“The lunatics are running the asylum!”. With these words Richard H. Thaler was ironically referring to the fact that, for the second time in a row, the American Economic Association was going to be headed by a non-mainstream economist, one being Thaler himself and the other one Robert Shiller. While prof. Shiller was already a Nobel prize recipient when he became president of AEA, with the Alfred Nobel Memorial Prize in Economic Sciences 2017 that was awarded today by the Royal Swedish Academy of Sciences, it would seem that the “lunatics” are no longer a minor, fringe movement in the academy.
But who are these “lunatics” by the way? In more technical terms, the current Thaler belongs to (and largely, represents) is known as behavioral economists. The best way to learn about the tenets of the discipline is probably is to read “Misbehaving – The Making of Behavioral Economics”, by professor Thaler. It is arguably the most entertaining way as well, given the author’s captivating style and humorous inflection.
It is worth noting that the origin of his interest in the topic dates back to the days when he was working with noted psychologists (and later, somewhat paradoxically, Nobel laureates in economics) Daniel Kahneman and Amos Tversky. It is thus less surprising, perhaps, that contrary to the standard assumption of the mainstrean theory, Thaler’s theory keystone is that the central agents of economy are humans, that is to say predictable and error-prone individuals. Under the (unrealistic) standard theory assumption of a perfectly rational human agent, Richard Thaler’s agents misbehave.
However, once the (behavioral) economist accepts this state of things, and bases his analysis on recent discoveries on human psychology, she can provide valuable insights on how markets work and also how government should address political and social issues. Irrationality plays a larger role in actors’ everyday life, and concepts such as ‘risk aversion’, ‘endowment effect’, ‘mental accounting’, and ‘limited rationality’ introduce unexpected asymmetries in the pattern of our behavior. In fact, this second sub-topic, is the focus of a previous book, authored with Cass R. Sunstein (a prominent legal scholar now at Harvard Law School), and its title (“Nudge”) was to become, in academic and public debates, almost a by-word for behavioral economics applied to public policies. According to its principles, a thoughtful “choice architecture” can be put in place by government or institutions to nudge our life towards the most beneficial options without limiting our liberty.
Both Thaler’s books, as well as “Thinking, fast and slow” (in which Kahneman summarizes decades of research and work with Tversky) are available at the Paris campus library. Other info about his publications, teaching, and research is available on the his faculty homepage at the Chicago Booth School of Business.