Economics

Thaler's Practical Contribution

He applied insights from psychology and neuroscience to a discipline that oversimplified human behaviors.

Joining the pantheon.

Photographer: Jonathan Nackstran/AFP/Getty Images

The Nobel Committee did well in awarding this year’s prize in economics to Richard Thaler. The University of Chicago scholar has made pioneering contributions to behavioral economics and finance that have been both influential and, in terms of practical applications, consequential and welfare-enhancing.

Overcoming several challenges from an economics profession too focused on elegant but unrealistic approaches, his work has direct relevance to observable outcomes and decision-making. That is one of many reasons why policy makers and investors should read Thaler’s accessible and engaging work, especially given today’s fluid global economy and unusual market dynamics.

Even before the Nobel announcement, behavioral economics and finance -- the application of insights from psychology and neuroscience to a discipline that overly simplified human behaviors and interactions -- have been attracting growing interest, and rightly so.

Thaler and others have already “nudged” individuals to make better decisions about their financial security, helped regulators better understand the drivers of excessive risk-taking, and provided investors with a better understanding of the perils of repeating past mistakes. Their work has encouraged governments and companies to make a greater effort to incorporate behavioral science, including elements related to unconscious biases, as well as comfortable but misleading rules of thumb and analytical shortcuts. The prize may also help in the multiyear challenge of restoring the standing and credibility of the economics profession, which took a battering after most economists completely misread the run-up and aftermath of the global financial crisis.

The laureate's work is also highly accessible. This is particularly true of his last two books, "Misbehaving: The Making of Behavioral Economics" and "Nudge: Improving Decisions About Health, Wealth, and Happiness," which contain engaging discussions of behavioral science, including its application to a range of real-world issues. They are must-reads for those who are new to this area of economics, as they help explain today’s world of fluidity and unusual uncertainty in economics and politics, in which markets have remuneratively disconnected in a striking low-volatility fashion.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Mohamed A. El-Erian at melerian@bloomberg.net

    To contact the editor responsible for this story:
    Max Berley at mberley@bloomberg.net

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE