Richard Thaler

Richard Thaler
Richard Thaler is an American economist who won the Nobel prize in

economics in 2017 through his significant contributions to behavioral
economics.
Over the past four decades, Thaler has studied how economic
decision-making by institutions and individuals is highly influenced by
natural human cognitive limitations, biases, and numerous other
psychological factors.Thaler researched the ways in which an
individual's real economic behavior deviated from these rational
norms.
Richard Thaler is married and has three children from a previous marriage.
In the words of his colleague and collaborator in his doctoral thesis,
Cass Sunstein, Thaler had an “unfailingly mischievous mind".
Personal History
Born- 12th September, 1945 East Orange New Jersey
Bachelor’s degree- in economics from Case Western

Reserve University in Cleveland, Ohio (1967)
Master’s(1970) and Doctoral(1974)- University of Rochester, New York
Teaching-taught at the Graduate School of Management at Rochester

(1974–78) and at the Graduate School of Business and Public Administration
at Cornell University, where he was appointed associate professor in 1980
and full professor in 1986.
After studies at Case Western Reserve University in Cleveland, Ohio, he
received his doctor’s degree at the University of Rochester in New York in
1974.
Doctoral Thesis
His doctoral thesis was on evaluating the monetary value of a human
life—which is often used by regulators to measure the benefits of
interventions that prevent deaths, say on highways or from air pollution.
Based on his thesis, Thaler published in 1976, a fairly influential research
paper on the theory and techniques of valuing a life statistically.
Thaler’s dissertation supervisor, the renowned economist Sherwin Rosen,

despite co-authoring the 1976 paper with him, was not quite impressed with
the young economist, later telling The New York Times, “We did not expect
much of him."
● The “value of a statistical life" that Thaler was estimating was based on
ascertaining the amounts that people are actually paid to incur risks in the
workplace. When workers face an additional mortality risk of 1 in 100,000,
how much more money do employers give them? is a situation in which one
party gets involved in a risky event knowing that it is protected against the
risk and the other party will incur the cost.
● “He started asking people two questions," wrote Sunstein. “The first: How
much would you pay to eliminate a mortality risk of 1 in 100,000? The second:
How much would you have to be paid to accept a mortality risk of 1 in
100,000? According to standard economic theory, people’s answers to the two
questions should be essentially identical. But they weren’t. Not close. The
answers to the second questions were much higher (often in the range of
$500,000) than the answers to the first (often in the range of $2000). In fact,
some people responded to the second question, ‘there is no amount you could
name.’ According to standard economic theory, that’s serious misbehaving."
● Thaler showed his results to Rosen, who told him to stop wasting his time. But
it was these results rather than the thesis he ended up writing that paved the
way for Thaler’s seminal contributions to behavioural economics.
He subsequently has taught at the Graduate School of Management at

Rochester (1974–78) and at the Graduate School of Business and Public
Administration at Cornell University, where he was appointed associate
professor in 1980 and full professor in 1986.He held distinguished service
professorships of behavioral science and economics at the University of
Chicago's Booth School of Business where he is currently working.
His 2015 intellectual autobiography Misbehaving provides an
engaging account of his academic career from the time of his doctoral
work, but his story was already well known courtesy of Lowenstein’s
(2001) article about him in the New York Time Magazine.
Work
How do human traits govern individual economic decisions and what effect do they
have on markets as a whole? Thaler researched the ways in which an individual's real
economic behavior deviated from these rational norms.
Since the 1980s, Richard Thaler has analyzed economic decision-making with the aid
of insights from psychology. He has paid special attention to three psychological
factors: the tendency to not behave completely rationally, notions of fairness and
reasonableness, and lack of self-control.
Role In Behavioral Economics
Richard Thaler is the father of behavioral economics.

Behavioral Economics has expanded since the 1980s. It can be traced back
even to Scottish economist Adam Smith who is credited for his concept of the
‘invisible hand’ that states that the prosperity of an economy depends if
individuals make self-interested decisions. He also recognised that people are
overconfident in their own abilities and afraid of losing rather than eager to
win. They focus more on short term benefits rather than long term benefits.
These concepts are the basis of behavioral economics today.
The assumption within the economic theory is that individuals always act
rationally and selfishly when it comes to making economic decisions.
Economists considered this idealization as valid for the purpose of the
studies. Thaler's work constantly disproved this assumption.
In the 1980s Richard Thaler began to build on the work of Tversky and
Kahnman, with whom he collaborated extensively.
Tversky and Kahnman had recognised that people rely more on easily
recalled information rather than on actual data.
Thaler’s ideas began when he was in graduate school. He observed that his
friend was willing to forgo a drive to a sporting event during a snowstorm
because they had been given free tickets. If they had purchased the tickets
themselves then they would have gone even though the price of the tickets
would remain the same. The danger of the snowstorm was also there.
This is an example of “sunk cost fallacy”- people are less willing to give up
on projects that they have personally invested in.
There were many non rational influences on economic behavior that Thaler identified. Some fell
into the category of bonded/limited rationality. Bounded rationality is the notion that behavior can
violate or even fail to conform to a norm of rationality but still be consistent with the pursuit of
goals and objectives. People and organizations now use bounded rationality to set up simplified
decision-making procedures in situations that face limited time, information and etc. These
procedures produce satisfactory results.
Thaler also identified that people's economic behavior is influenced by their social preferences,
particularly their perception of fairness, and that they will consciously make decisions that may
harm themselves if they believe doing so will help maintain fairness or prevent an unfair
situation. For example, people may make personally harmful decisions to penalize an economic
actor who they believed has behaved unethically, this is what is happening when consumers
boycott businesses that have unethical environmental practices.
Another non rational influence he explored was a lack of self-control. He saw how often results
in the failure to adequately save for retirement or to reach financial goals. His view, which is
shared with multiple other psychologists and social scientists, is that the phenomenon of poor
self-control regarding financial decisions can be explained by the fact that experiences in the
present or the near future are considered more significant than those in the distant future. Along
with another economist Hersh Shefrin, Thaler developed a behavioral model (the planner doer
model) that captures the tension most people face between their long-term desire for
security/well-being and their short-term desires for other things. Thaler believes that people are
both far-sighted planners and short-sighted doers and the goal of social policy should be to
assist the planning self without frustrating the doing self, with respect to what is known about
nonrational influences on the doing self's behavior. This planner0doer approach has found
application in the design of retirement savings programs called Save More Tomorrow. This
program allows individuals to commit themselves to save a certain percentage of their future
pay increases through payroll deductions. Due to people's bias towards the present, it is easier
for them to accept reductions in disposable income that will occur in the future rather than what
would occur now.
Nudge Theory
Thaler is extremely popular for promoting Nudge Theory. ‘Nudge’ is a
conceptual device for leading people to make better decisions.
His work has extremely practical and relevant applications in policy. It
suggests that policies, both public and private could be made more
effective by integrating subtle "nudges" to steer people towards desirable
decisions without depriving them of their freedom to choose. This approach
is called libertarian paternalism.
Example: People are more willing to drive across town to save 10$ of 20$
rather than save 10$ off 100$ on a flight. The effort expended as well as the
amount of money saved would be the same.
Nudge in behavioral economics is a way to manipulate people’s choices to

lead them to make specific decisions.
Example: If I were to keep a fruit on a cashier or at eye-level a person would
be inclined/’nudged’ to take it. An essential aspect of nudge is that they are
not coercive. Banning Junk food is not nudging, nor is punishing people who
eat junk food.
Thaler’s ideas of Nudge were popularised in his book ‘Nudge: Improving

Decisions about Health, Wealth, and Happiness’ which was released in 2008
along with his former legal scholar Cass Sunstein.
Thaler’s insights have been applied by policymakers in many

other areas, including health care, energy, environmental
protection, consumer protection, education, unemployment, and
national security. Some countries, including the United States,
have even created select bodies of experts, called “nudge units,”
to improve social policies by augmenting them with nudges.

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Richard Thaler

Richard Thaler is an American economist who won the Nobel prize in

Bachelor’s degree- in economics from Case Western

Master’s(1970) and Doctoral(1974)- University of Rochester, New York

Teaching-taught at the Graduate School of Management at Rochester

Thaler’s dissertation supervisor, the renowned economist Sherwin Rosen,

He subsequently has taught at the Graduate School of Management at

Richard Thaler is the father of behavioral economics.

Nudge in behavioral economics is a way to manipulate people’s choices to

Thaler’s ideas of Nudge were popularised in his book ‘Nudge: Improving

Thaler’s insights have been applied by policymakers in many

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