When Professor Richard Thaler of the University of Chicago received the news that he had won the Nobel Memorial Prize in Economic Sciences for “contributions to behavioral economics,” he faced an eager press with unusual mirth. What’s the story behind Professor Thaler’s jovial response?
Maybe he is laughing because the joke is finally on the empirically-starved economists whose dominance of the field is finally being challenged by a handful of increasingly noticed “behavioral economists.” In turning the tide of mainstream economic thought, Thaler and his colleagues reject the myth of the hyper-rational consumer – “homo economicus” – who are primarily motivated to maximize utility. It has been a struggle for these less dogmatic economists who for almost three decades have incurred ridicule and condescension by the mathematical economists of the Chicago School of Economics, before people started questioning theories of consumer behavior that are absurd on their face.
Years ago, I asked my Econ 101 professor after class whether the basis of economics is psychology. He gave me an incredulous look and asserted that economics was far too precise a discipline to be so vaguely rooted.
Perhaps Professor Thaler had a similar inquiry as a student watching his economics professors mark up the blackboard with intricate models of how markets and consumers work. Perhaps he was struck by a clear contradiction; He would ask, “Really?” Repeatedly, he would ask “Really?” because this was not how consumers he knew, including himself, operated when they bought or didn’t buy goods and services.
Thaler’s skepticism helped him produce books and articles showing an obvious but powerful truth: that people are consistently and predictably irrational and will act in a way that undermines their own self-interest. And contrary to the dogma of mainstream economics, the market overall doesn’t filter out such irrationality to avoid messy realities.
It’s a small wonder Dr. Thaler is jovial. He has reproduced what the much deprecated Home Economists and later the leading consumer advocates have documented ad infinitum. He built with more bracing analyses concise narratives involving many examples taken directly from consumer protection studies, together with his own common sense observations and candid descriptions of his own irrational behavior. For this he receives his profession’s most coveted prize, while home economists and consumer advocates keep toiling away, their heroism unsung to the majority of consumers who would benefit from this consumer-based wisdom regarding buying and saving smarter than they have been doing (e.g., avoiding frauds and harmful irrational choices) so as to protect their health, safety and pocketbooks.
The Nobel Committee praised Thaler as “a pioneer on integrating economics and psychology.” Maybe this is true in the case of the ‘dismal science’ of economics, but it does not account for the thousands of people who have worked to advise people to buy more nutritious foods, choose safer cars and medicines, be more savvy in buying insurance and borrowing and reject the deceptive ads from avaricious vendors flooding the airwaves.
Many mainstream economists got their kicks, promotions and consultantships by playing with complex numbers having concern for human experience, whether manipulated, gouged or drawn from ignorance, despair, fear, lack of time or gullibility. No matter their irrelevance to the real world, these economists were remarkably arrogant toward any of their “soft-headed” colleagues who worked in what was once called the ‘political economy’ or in the field of ‘consumer economics.’
I recall sharing a dinner table in the late nineties with Federal Circuit Judge Frank Easterbrook (an adherent of the Chicago School of Economics), who sneeringly described Derek Bok of Harvard as someone who wouldn’t recognize a regression analysis if it hit him between the eyes.
Getting closer to reality, to on-the-ground evidence of the many human behavioral variables that cannot be quantified by computers so smugly, is the real challenge of social science. Thaler et al. now have the ‘prestige’ to press these other corporate economists to jettison their myths, climb down from their abstraction ladders and face the facts, urgencies and injustices of their time. Getting a grip on the way things really are may deny them some riches from their corporate patrons, for whom they so often shill. But it may encourage economists to embrace what their profession should be about: independent thinking, expanding knowledge and service to the public.
In a backhanded slam against his pompous or indentured (take your choice) brethren, Professor Thaler made a key point (quoted in the New York Times) in a presidential address at the American Economic Association in January 2016: “I think it is time to stop thinking about behavioral economics as some kind of revolution,” adding that, “all economics will be as behavioral as the topic requires.”
In an important sense, however, behavioral economics is a revolution – a revolution against the pitiless abstractions that have shaped the phony cost-benefit equations of corporatist economists who still work to undermine regulatory law and order in the fight against serious corporate misbehavior.