JUDY WOODRUFF: Now a look at the winner of
this year's Nobel Prize in economics, announced
today.
Richard Thaler is a professor at the University
of Chicago's Booth School of Business.
The award acknowledged his groundbreaking
work in establishing the field of behavioral
economics, which blends psychology with economics
to better understand human decision-making.
We start with a little bit of background from
our economics correspondent, Paul Solman.
It's part of his weekly series Making Sense.
PAUL SOLMAN: In Chicago's Millennium Park
two-and-a-half years ago, Richard Thaler,
the academic revolutionary who won this year's
Nobel Prize for insisting, for decades now,
that his field, economics, is wedded to distorted
view of human behavior.
Economics teaches that we're all rational
maximizers, mathematical machines, who use
our big, brainy heads to carefully calculate
every decision as we strive to reach concrete
objectives, creating.
But look, Thaler explained:
�MDNM�RICHARD THALER, Nobel Prize Winner:
After the '87 crash, when the market fell
20 percent in a day, and the Internet bubble,
when the Nasdaq went from 5000 to 1400, and
then the real estate bubble, which led to
a financial crisis from which we're still
trying to extricate ourselves, the idea that
markets work perfectly is no longer tenable.
PAUL SOLMAN: Thaler has been running his revolution
from inside the belly of the beast, the University
of Chicago, which boasts 28 other Nobel laureates
practiced in traditional economics.
Collectively, they have created what's known
as the Chicago School, predicated on the perfect
efficiency of markets, in which prices rationally
reflect all available information.
But Thaler started noticing market irrationality
early in his career as an economist.
RICHARD THALER: The market would be up in
January.
It would go up on Fridays, down on Mondays.
It would go up on the day before holidays.
None of this made any sense.
PAUL SOLMAN: But it was only when Thaler began
doing experiments and publishing them that
doctrinaire economists, whom he calls e-cons,
began to admit some of the error of their
ways.
Take the concept of sunk costs, time and money
already spent.
An e-con assumes everyone knows when to quit,
cut their losses, move on.
This group of Cameroonian students at first
seemed to just as economics would predict.
RICHARD THALER: Let's suppose you bought tickets
to go to a concert over here at this fancy
bandshell 40 bucks each.
And the group is OK, but then it starts to
rain.
How long do you think you're going to stick
around this concert?
MAN: Not much.
PAUL SOLMAN: Not much?
RICHARD THALER: Not much.
PAUL SOLMAN: But what if the sunk costs had
been much higher?
How many of you would have a different decision
about staying or leave leaving, if it was
$500, as opposed to $40?
Every single one of you.
MAN: I have to make my money worth it.
PAUL SOLMAN: You have to make your money worth
it.
MAN: Yes.
PAUL SOLMAN: And your point here?
RICHARD THALER: Well, economists would say
how much you paid for the ticket, tough luck,
if it's $40 or $500.
PAUL SOLMAN: Doesn't matter.
RICHARD THALER: You should just decide whether
the music is worth the annoyance of the rain.
PAUL SOLMAN: In the past few years, Thaler's
behavioral economic insights have been applied
by governments around the world, including
ours.
And how did he feel about being called the
inventor of behavioral economics?
RICHARD THALER: One guy can't create a field,
but you can get people thinking.
PAUL SOLMAN: And so he has.
This is economics correspondent Paul Solman.
JUDY WOODRUFF: For more, we turn to Richard
Thaler himself.
He got the call that he won the Nobel at 4:00
a.m.
I spoke to him just a short time ago and began
by noting, as we just heard, that he has been
honored for recognizing that people don't
always act rationally when making economic
decisions, and asking if that is the way he
sees his contribution.
RICHARD THALER: Well, yes, although pointing
that out is kind of obvious to everybody,
except economists.
(LAUGHTER)
RICHARD THALER: So, in some ways, it's pointing
out the obvious.
But I think the contribution that I have made,
and the young economists following in my footsteps
have made, is saying, OK, what follows from
there?
How should we do things differently if people
aren't perfect?
And there's a lot of things we can do better.
JUDY WOODRUFF: What do you think the main
consequence of your research has had on economics
and on policy?
RICHARD THALER: Well, on economics, I think
it's made especially young economists more
open to thinking outside the box.
I coined the phrase supposedly irrelevant
factors for the kinds of things that economists
are sure don't matter, like the way a letter
is worded or what the default option is.
And these kinds of things are supposedly irrelevant
because they're actually really important.
So I think, on the professional side, that's
the most important thing.
On the policy side, the work I did with Cass
Sunstein, my former colleague, now Harvard
law professor, in our book "Nudge" really
shows how you can help people if you grant
that they're not saving enough for retirement
or they're overweight or they'd like to do
more to save the environment, but aren't sure
how to do it.
What are the steps you can take to help people
make better decisions?
JUDY WOODRUFF: Was your finding or set of
findings as much a psychological-sociological
observation as it was an economic one?
RICHARD THALER: Well, I was borrowing findings
from psychology and trying to incorporate
them into economics.
So, economic models are pretty sterile, and
there are these agents that really could be
robots that calculate at lightning speed and
aren't absent-minded and never eat too much
or drink too much, kind of just like you and
me.
But by fleshing out the way real people behave
and our weaknesses, as well as strengths,
people are nicer than economists give us credit
for.
We're more likely to contribute to charity.
Or look at all the volunteers in these are
hurricanes and other natural disasters.
Economists have no explanation for why people
would work for days trying to clear away rubble
in an earthquake.
So, that's the nature of humans.
I guess we call it human nature.
And incorporating human nature into economics
is what I have been trying to do for 40 years.
JUDY WOODRUFF: Someone said to me that part
of what you have done is take the fringes
of economics and make it respectable, bring
it into the mainstream.
RICHARD THALER: Yes, a lot of team have thought
of me as a fringe player.
(LAUGHTER)
RICHARD THALER: But, yes, I think -- I often
say I work in the gap between economics and
psychology.
Psychologists know a lot, but most of them
aren't very interested in public policy problems,
and certainly wouldn't have a clue what to
say about Federal Reserve policy or taxes
or any of the other bread-and-butter issues
that economists think about.
And most economists don't have any interest
in psychology.
So, there was a lot of ripe fruit for the
plucking.
JUDY WOODRUFF: So, I'm going to take advantage
of having you here.
Everybody's watching the stock market shoot
up over the last several months.
If you could spend a few minutes with every
family in this country right now trying to
make tough decisions about spending and saving
and investment, what would you say to them
about the market and about the economy in
general?
RICHARD THALER: Well, look, I think that the
economy is strong.
We have been on a nice ride since the depths
of the great recession.
As far as the stock market goes, personally,
I'm a little worried about it.
There's no real explanation for why it keeps
going up, other than interest rates are low
and people aren't sure where to put their
money.
So, if I were giving advice to people, it
would be to say not to spend the 10 percent
or 15 percent you have made most recently
in the stock market, and maybe even take a
little of that money off the table, if you're
likely to need it any time soon.
JUDY WOODRUFF: Some advice from the latest
Nobel Prize winner in economics.
Professor Richard Thaler, congratulations
again.
Thank you very much.
RICHARD THALER: Thank you, Judy.
