Richard Thaler '74
Richard Thaler was born September 12, 1945, in East Orange, New Jersey. He received a BA in economics from Case Western Reserve University in 1967. He received his PhD degree from the Department of Economics at the University of Rochester in 1974, working under the supervision of Professor Sherwin Rosen. Professor Thaler is currently on the faculty of the University of Chicago Booth School of Business, where he holds the title of Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics.
Professor Thaler was awarded the 2017 Nobel Prize in Economic Sciences for his pioneering contributions to the field of behavioral economics. A distinguishing feature of Professor Thaler’s work is its broad applicability: concepts derived from or otherwise central to his work—such as present bias, the endowment effect, mental accounting, loss aversion, and of course, nudges—have not only entered everyday vernacular but have had an immense practical impact. Indeed, former British Prime Minister David Cameron created a Behavioral Insight Team after reading Thaler’s best-selling book, Nudge. Many policy institutions have followed suit.
The paper “Some Empirical Evidence on Dynamic Inconsistency” (1981) was one of the first experimental studies to document the present-bias effect in humans and the resulting dynamic inconsistency of behavior. A real-life example is the tendency of people to continually postpone tasks with long-term benefits, such as saving for retirement or starting a diet, in favor of immediate gratifications. In contrast to standard economic paradigms, such behavior means that governments can improve welfare by helping people commit to a plan.
Beginning with the paper titled “Mental Accounting and Consumer Choice” (1985), Professor Thaler argued, and showed, that people often compartmentalize important decisions that should be analyzed jointly. An important implication is that, by failing to coordinate their choices, people fail to diversify and reduce the risks they face. Indeed, as Thaler and Benartzi showed in “Myopic Loss Aversion and the Equity Premium Puzzle” (1995), mental accounting can explain why people perceive the stock market to be riskier than it is and end up with portfolio allocations that are too conservative. In particular, mental accounting can help explain the celebrated equity premium puzzle of Mehra and Prescott.
Among Professor Thaler’s many other contributions, one would be remiss not to mention his brief but powerful performance in the Oscar-winning movie The Big Short, in which Professor Thaler discusses the causes of the 2008 financial crisis.
Written by Asen Kochov (October 10, 2017)