Richard H. Thaler's is an economics with a human face. An economics that does not consider us infallible, but investigates our psychological dynamics.
In a surprise decision, the Nobel Prize in Economics 2017 was awarded to Richard H. Thaler. An American, Thaler recently turned 72 and is a professor at the University of Chicago. With this prestigious accolade, the Swedish Academy wished to recognise "his contribution to behavioural economics". This branch of political economy borrows certain concepts from psychology to explain the consequences, in economic terms, of our being human. And, as humans, never one hundred per cent rational, but prone to errors and indecision.
Thaler's work began in the 1970s with a bold critique of classical economic theory, which paints a world in which supply and demand meet at the perfect equilibrium point. And the homo oeconomicus, drawing on the information available to him and his personal capabilities, always seeks to obtain the maximum advantage for himself, minimising costs.
According to Thaler, things are not exactly like this. Or rather, human beings can be divided into two broad categories: Econs, completely rational and therefore capable of always making the correct decision, and Humans, meaning all of us. We who, in purely theoretical terms, know which is the best-value product to choose from the supermarket shelf, the most promising job offer, the right school for our children. Despite this, we do not always make the right choice. It is precisely on Humans that Thaler's research focuses. His most celebrated work is the book Nudge: La spinta gentile (published in Italy by Feltrinelli), written together with Cass R. Sunstein in 2008 and quickly becoming a bestseller.
Curiously, Thaler comes from the School of Business at the University of Chicago, the stronghold of the free-market economics school. A school that for decades was dominated by Milton Friedman (Nobel Prize in Economics 1976), who fought to let the market regulate itself, limiting as much as possible state intervention and recourse to public spending; theories that Ronald Reagan and Margaret Thatcher drew upon extensively. Among Friedman's students were also José Piñera and his Chicago Boys, who played a central role in the economic policies of Augusto Pinochet's Chilean government. During the years of the Chicago School's dominance, Thaler was one of the few to challenge classical economic theory and was therefore almost entirely relegated to the margins.
In its reasons for awarding the Nobel to Thaler, the Swedish Academy names three fundamental concepts of behavioural economics. The first is that of bounded rationality. According to Thaler, in order to simplify our financial decisions, we all develop a mental accounting system structured in watertight compartments. In purely theoretical terms, 100 euros always have the same value, regardless of whether they are a gift or our salary. In practice, however, our minds contain many separate drawers: when we have to make a decision, we file it in a single drawer and focus on its individual impact, rather than imagining the overall one.
In our mental accounting, moreover, gains and losses do not carry the same weight. We always seek to avoid losses, which cause us far greater distress. This means that when we come into possession of a product we tend to assign it a much higher value (a phenomenon known as the endowment effect).
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Social preferences is the second concept cited by the Swedish Academy in its reasons for awarding the Nobel. Thaler has long studied the concept of economic fairness, going so far as to say that, when demand is high, consumers' concerns about fairness may lead companies to decide not to raise prices; this does not happen, however, during periods when costs rise. Thaler is one of the fathers of the dictator game, an experiment to measure altruism.
Among the merits of behavioural economics is that of giving scientific depth and relevance to phenomena we experience firsthand. Why do we promise ourselves to save for old age, or to adopt a healthier lifestyle, and then fail to stick to our resolutions? The reason, according to Thaler, lies in the lack of self-control (the third and final pillar highlighted by the Academy).
Precisely to address this lack of self-control, Thaler coined the term nudging, that gentle nudge which gives its title to his most celebrated work. Behavioural economics holds that people may have access to all the information necessary to make the very best choice, but often get it wrong. This is because they are influenced by context, a phenomenon known in the jargon as framing (literally, the "frame" in which that information is presented).
If this is the case, it is also possible to harness this phenomenon for good, by seeking to steer people towards the most reasonable choices. This is libertarian paternalism: each of us is free to make our own choices, but authorities can present those choices in a way that encourages virtuous behaviour. The examples are, all things considered, intuitive, even for those with no background in economics. A gentle nudge, for instance, is that of American companies which automatically enrol their employees in the company pension fund, with the option to opt out.
