The Nobel Committee Recognizes the Obvious
The Swedish committee that awards the Nobel Prize 1 in economics is famously slow and conservative: It has honored behavioral economist Richard Thaler because decades of experience have proven the value of his contribution.
If only the laureate's own profession were so responsive.
Thaler has devoted his career to developing an idea that challenges orthodox economics -- the fact that humans aren't always rational, and don't always act in their own best interests. Among other things, they lack self-control, they're inconsistent in how they value things, they have an outsized fear of losses, and they overreact to bad news.
Various businesses -- payday lenders, car rental companies, video streaming services -- have long exploited such psychological insights to take advantage of consumers. More recently, thanks to the efforts of Thaler and his collaborators, companies and governments around the world have tried to use them for people's benefit. They've looked for ways to "nudge" people to save more for retirement, drive safely, go to better colleges and participate in free school-lunch programs.
Yet decades on, and after a crash that brutally demonstrated the limits of the "rational actor" approach, macroeconomic theory has hardly moved. The mathematical models that guide policy in finance ministries and central banks are still based on assumptions that don't fit the facts -- on the idea, for instance, that people smooth out consumption over their entire lifetimes.
Thaler notes in his latest book, "Misbehaving: The Making of Behavioral Economics," that much more academic work is needed to illuminate vital questions facing policy makers: how to change tax systems to encourage investment; how to encourage people to spend more when higher spending is needed to support the economy; how to discourage borrowing when excessive debt threatens financial stability. These and countless other issues require subtler research, in the spirit of behavioral economics, into how people actually respond to changes in policy.
Improving economics as a science will require economists to act more like scientists -- rejecting models that don't fit, relying more on experiments, and replicating findings to test their validity. Top journals should see it as part of their job to challenge the prevailing theories. And improving economics as a guide to policy requires, in addition, more skepticism. Economists and policy makers need to worry more about the assumptions that underlie their proposals, and not just about the math that yields answers once those assumptions are made.
Thaler richly deserves his Nobel. If his prize nudges economics in the right direction, even better.
--Editors: Mark Whitehouse, Clive Crook.
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