Richard H. Thaler is this year’s big swinging dick of the econ profession. You probably know him from his 2015 cameo in the narratively gnarled film The Big Short (he was sitting next to sexpot Selina Gomez at a blackjack table and gave a nice elucidation of synthetic CDOs). His radical research lies smack-dab at the intersection of psychology, sociology and economics. He is considered a swashbuckler in the fields of behavioral economics and finance (along with Daniel Kahneman, Amos Tversky and, of course, J.M. Keynes) and has argued that econometric and quant methods aren’t necessarily the field’s holy grail. He is the author of numerous articles and books (our faves are Nudge and Misbehaving: The Making of Behavioral Economics), and loves to deliver quick-witted tirades against America’s “highly irrational” President, Donald Trump, and his supporters.
We love Professor Thaler for his trans-disciplinary approach to economics, and for empirically formalizing the principle that we are all imperfect, irrational actors ― “more akin to Homer Simpson than to the ‘rational actors’ dreamt up by the econ profession’s bygone eggheads.” For Professor Thaler, the prime movers of the economy are humans ― quasi-predictable, error-prone individuals with countless quirks engaging in freaky, bias-laden behavior.
Traditional economics assumes rational actors (‘homo economicus’) akin to Star Trek’s Spock. Early in his research, Professor Thaler realized these Spock-like automatons were nothing like real people. Whether buying a bond or a stock, selling a used car, or applying for a loan, we all succumb to cognitive biases and make decisions that deviate from the standards of rationality assumed by neoclassical economists. In other words, we misbehave. More importantly, our misbehavior has serious consequences, and creates a causal chain of convolutions and distortions. Dismissed at first by mainstream economists as a fringe framework, the study of human miscalculations and their effects on markets now drives the profession, especially for active investors and business economists who make their cheese by identifying anomalies and arbitraging away the distortions/inefficiencies.
Coupling recent discoveries in human psychology with a practical understanding of incentives and market behavior, the newly minted Nobel Laureate enlightens us all on how to make smarter decisions in a complex, fucking confusing world. He reveals how behavioral economic analysis opens up new vistas for thinking about finance, decisions under uncertainty, ‘animal spirits’, and reconciling ‘utility-maximizing’ dilemmas.
Images via WIKIMEDIA COMMONS + University of Chicago
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