Father of behavioural economics wins Nobel prize
The FT's economics correspondent explains the work of Professor Richard Thaler in the growing the field of behavioural economics.
Produced by Alessia Giustiniano. Filmed by Rod Fitzgerald.
The winner of this year's Nobel Prize in Economics Science is Richard Thaler, one of the leading figures in the field of behavioural economics. I'm joined by the FT's Economics Correspondent Gemma Tetlow to discuss the significance of Thaler's work. Gemma, thanks for joining me. The prize committee said they gave the prize to Thaler for his contributions to behavioural economics. Could you say a bit about the principal characteristics of this branch of economics?
Behavioural economics is essentially the branch of economics that tries to bring some insights from psychology into economic modelling. So trying to use the insights that psychologists have about the way that people think about things and the way they make decisions to help understand behaviour in the real world and help design policy to take into account those behavioural aspects.
And what would you say is Thaler's main contribution to that field?
He's been one of the fathers of this field who really pointed out a number of quite key, perhaps common sense assumptions but that really sort of challenged the way that traditional economics thought about some of these things. So for example, the importance of limited self-control. People find it difficult to make long-term decisions, and are very focused on the short term. The fact that people really care about fairness in how, for example, businesses behave.
You've just alluded to the way in which behavioural economists like Thaler seek to undermine or at least complicate, drastically complicated assumptions traditionally made by economists about the way economics actors behave rationally or not. How influential have Thaler's insights and those of other behavioural economists, you think, been on the rest of the profession?
Traditionally, economists have assumed a sort of simplicity in doing the models that people behave rationally. And economists have always known that people don't strictly behave rationally, but they assume that any deviations, were a system is small that it didn't really matter. But Thaler's insight really just shows that actually even quite small deviations from rationality can have big impacts on the way that people behave in the marketplace. And that really is starting to have a really core impact on the rest of the profession. Behavioural economics used to be quite a fringe, controversial field, and it's now a core part of what people will be doing in undergraduate economics.
And this work and Thaler's in particular is not just having an impact on the profession. It's having an impact, as you said earlier, on policy. Now, the Nobel has often gone in the past, to economists doing highly technical mathematical work whose application to policy is not obvious, but that's absolutely not the case with Thaler, is it?
No. I think, very unusually, this is probably a Nobel Prize winner who will be much more familiar to members of the general public outside the economics profession. I think he is possibly the first economics Nobel Prize winner to have featured in the Hollywood movie, I think up till now. So he will be much more familiar, and he certainly had a big impact with his ideas in policymaking in the UK and the US and many other countries.
And perhaps the idea that had the biggest impact is this idea of the nudge. Can you say a bit more about that?
So the nudge, which is a term that Richard Thaler and his colleague, Cass Sunstein, coined. The idea there is that you can shape people's behaviour by making things easy for them. So if you want them to make a particular choice, make that choice the easiest thing for them, to nudge them in the direction of doing that.
For example, we have a a list of recent policy changes in the UK where we have automatic enrollment and pension schemes. So rather than people having to opt into a scheme, they now have to opt out of it. And that simple change just nudges people towards staying in this game rather than being out of it.
Gemma, I hope what you've said about Thaler's work is a nudge to those of our viewers who haven't read him to do so. Thank you very much.