340. People Aren’t Dumb. The World Is Hard.

You wouldn’t think you could win a Nobel Prize for showing that humans tend to make irrational decisions. But that’s what Richard Thaler has done. The founder of behavioral economics describes his unlikely route to success; his reputation for being lazy; and his efforts to fix the world — one nudge at a time.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Stephen J. Dubner?

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• 0:48Stephen J. Dubner?

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• 1:19Stephen J. Dubner?

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• 2:09Stephen J. Dubner?

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• 2:50Stephen J. Dubner?

  So let's begin, if you would, say your name and title.

• 2:53Richard Thaler?

  I'm Richard Thaler. I'm a professor at the Booth School of Business at the University of Chicago.

• 3:00Stephen J. Dubner?

  I see. Technically, you're called the Charles R. Walgreen Distinguished Service Professor of Behavioral Sciences, blah, blah, blah. Is that accurate, the Walgreen?

• 3:09Richard Thaler?

  Yeah, yeah, yeah, that's accurate. But I didn't want to take up the whole podcast.

• 3:13Stephen J. Dubner?

  I understand.

• 3:14Richard Thaler?

  With my title.

• 3:15Stephen J. Dubner?

  I was curious, however, I guess it's an endowed chair or something. Yeah, is that what that is?

• 3:20Richard Thaler?

  Yeah. In fact, it's a, it's a chair that has only been held by three people, all of whom have won a certain prize.

• 3:30Stephen J. Dubner?

  Ah, interesting. More important, though, I want to know, as it's bestowed by the Walgreen family, does the position come with a discount at Walgreens drugstores?

• 3:41Richard Thaler?

  There is no discount that I've been informed of.

• 3:45Stephen J. Dubner?

  That said, you, and I guess the other two holders of said chair,

• 3:50Stephen J. Dubner?

  well, you, you are about a million-plus dollars richer since you were last on the show, because I understand that you went out and won a Nobel Prize and that they give you some money with that.

• 4:00Richard Thaler?

  Now that you mention that, you know, I won that prize in spite of your best efforts to prevent it.

• 4:09Stephen J. Dubner?

  I don't-

• 4:10Richard Thaler?

  And so, you know, I think the show owes me an apology, like, on the air.

• 4:16Stephen J. Dubner?

  This is like sore winnerdom we're seeing. You win the Nobel Prize, having been on our show previously, talking about potentially winning the Nobel Prize, and yet somehow you're sour about our theoretically negative influence, when in fact, the outcome was positive. What kind of logic is that?

• 4:36Richard Thaler?

  Well, no, but it's not the interview with me. It was the interview with Per Stromberg, where you outed me. I'm sure you guys can find the tape.

• 4:50Stephen J. Dubner?

  Yeah, we found the tape.

• 4:53Speaker 02

  So I'm actually not allowed to, to talk so much about what happens.

• 4:57Stephen J. Dubner?

  The episode was called "How to Win a Nobel Prize." Per Stromberg is on the committee that awards the economics prize. As he pointed out, he couldn't say too much about the secret process, but, he said, his committee was very reliant on the reports they commissioned on potential winners.

• 5:13Speaker 02

  Our goal is to keep on scanning the field of economic sciences, broadly speaking. And to keep this up to date, we continuously send out these reports, basically scanning the field. So these are super helpful, and, and, and they're sent to, you know, really top people in these fields, who put a lot of work into these reports. So this is probably our most important input, in a sense.

• 5:35Stephen J. Dubner?

  And those reports remain confidential for 50 years, correct?

• 5:38Speaker 02

  Exactly.

• 5:39Stephen J. Dubner?

  So Richard Thaler tells me that he was asked many years ago to write a, a report. He was commissioned to write a report on, on the work of Daniel Kahneman and Amos Tversky, who-

• 5:54Richard Thaler?

  You described me revealing I had written a long report on my friends Kahneman and Tversky back in the 1980s.

• 6:04Stephen J. Dubner?

  Right.

• 6:04Richard Thaler?

  And, and you, you told Per I had told you that, and, and I think his words were, "Oh, he shouldn't have done that."

• 6:12Speaker 02

  I'm not sure he was allowed to say that, but fine.

• 6:15Stephen J. Dubner?

  Oh, okay. Well, that's, that's his problem, not mine.

• 6:21Richard Thaler?

  This show owes me an apology for trying to block my slim chances and drive them to zero.

• 6:30Stephen J. Dubner?

  Well, let me ask you, just to entertain the counterfactual, maybe it made that Nobel Committee think, oh, that Thaler, he's his own man. He identifies what he thinks are important ideas, and he feels it's important to disseminate them, even at personal risk to himself, and because-

• 6:49Richard Thaler?

  You know, well, it would be a line you could have used, you know, "I was holding off on the lawsuit until it was clear I hadn't won." But I think you're safe now, Steve, so we can, we can move beyond this.

• 7:07Stephen J. Dubner?

  And move beyond this we shall. Today on Freakonomics Radio, the unlikely rise of Nobel laureate Richard Thaler.

• 7:19Richard Thaler?

  Suppose they did all the stats on Thaler, no one would have drafted him.

• 7:25Stephen J. Dubner?

  His big Hollywood moment, also unlikely. Well, here's Dr. Richard Thaler, father of behavioral economics and Selena Gomez, to explain. The rather humble purview of behavioral economics.

• 7:37Richard Thaler?

  It's the sort of thing that your mother might say, "Really? You make a living doing that?"

• 7:44Stephen J. Dubner?

  And if behavioral economics were a bumper sticker, what would it say?

• 7:49Richard Thaler?

  So, we don't think people are dumb, we think the world is hard.

• 8:07Speaker 03

  From Stitcher and Dubner Productions, this is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen Dubner.

• 8:22Stephen J. Dubner?

  Years ago, Richard Thaler became enthralled with a new line of research about decision-making by the psychologists Amos Tversky and Danny Kahneman. Thaler went on to collaborate with them, thereby helping to create the field now known as behavioral economics. To mainstream economists, Thaler's research was often an irritant. He insisted that the elegant models they used to describe human economic activity were, in fact, grotesquely inelegant, because they failed to factor in how real humans actually think and decide and behave. Over time, however, Thaler's work came to be tolerated, if not outright accepted. Along the way, he wrote a few books, including Misbehaving: The Making of Behavioral

• 9:05Stephen J. Dubner?

  Economics, and Nudge: Improving Decisions About Health, Wealth, and Happiness. Today, governments around the world are running so-called nudge units, hoping to harness the simple power of Thaler's ideas in the pursuit of better outcomes in health, education, personal finance, and crime reduction. Many other institutions and firms are practicing what Thaler has been preaching, often to quite substantial success. If Kahneman and Tversky were the architects of this behavior revolution, Richard Thaler was the man who turned their sketches into something we could actually inhabit.

• 9:47Stephen J. Dubner?

  I have a lot of questions for you today, and we also solicited listener and reader questions. So we'll toss them in as we go. Here's one from Jose Albino Sanchez. He writes, he's an economics major who graduated from Notre Dame in 2016, so congratulations. He wants to know, how did you, Richard Thaler, use your behavioral economics research to not run away with the 1 million-plus prize money of the Nobel Prize and go buy a Ferrari? And I should say, that's assuming you didn't do that. But I, like Jose, am curious how you use your behavioral knowledge to spend, or not spend, yet your money.

• 10:24Richard Thaler?

  Well, you know, like every Nobel winner, I think, is asked this question. What are you going to do with the money? And they asked me this at 4:45 in the morning. The routine is you get this call at 4:00 AM Chicago time. And once they've convinced you this is not a prank, they say, okay, get ready. There's a press conference in 45 minutes. And I hopped in the shower and then I'm on a press conference. And the first question is, what are you going to do with the money? And all I could think of was, well, to an economist, this is like a silly question, an impossible question.

• 11:05Stephen J. Dubner?

  To most economists, perhaps.

• 11:07Richard Thaler?

  Well, certainly to a non behavioral economist, it's a silly question.

• 11:12Stephen J. Dubner?

  Because the answer would be it just goes into the pool with the other money. It's no different than any other, is that why?

• 11:16Richard Thaler?

  Right. The proceeds of that money, half of which will end up in the US Treasury, are sitting in some account at Vanguard. And, you know, if I go out for a fancy dinner, there's no way for me to label that Nobel money, though that might be a fun thing to do. I've thought that maybe the hedonically optimal way to spend the money would be to get a special credit card.

• 11:50Stephen J. Dubner?

  Mm hmm.

• 11:51Richard Thaler?

  The Nobel credit card.

• 11:52Stephen J. Dubner?

  Yeah, nice.

• 11:53Richard Thaler?

  And then when, you know, I decide to buy a ridiculously expensive set of golf clubs, hoping that that will turn me into a competent golfer, then I just whip out the Nobel. That might be a good idea.

• 12:12Stephen J. Dubner?

  Now, I'm curious, you do believe, and in fact helped identify the notion that we think of as mental accounting, which I know that the smart people tell you you shouldn't do that, you shouldn't set aside money for vacation or for a certain project because money is fungible. That's one of the beauties of money. And yet. As you discovered, many people do it, and you also argued it's not such a bad idea. Or at least, since so many people do it, we should figure out how to, how to deal with it. But is there a kind of a cookie jar on the counter where you've got the half a million that you can dip into whenever you want to do something fun?

• 12:49Richard Thaler?

  Yeah, that would be a really good idea, especially-

• 12:52Stephen J. Dubner?

  And what's your address, by the way?

• 12:54Richard Thaler?

  Especially if we announce it on the radio.

• 12:58Stephen J. Dubner?

  But why, why'd you stick it in Vanguard where it just becomes like, you know, more dollars mixed in with the others?

• 13:03Richard Thaler?

  Well, you know, I haven't, I've been busy, Steve. So, yeah, maybe you're, you're getting me to think about labeling it. And of course, maybe we should figure out what percentage maybe all should go to some cause and that would make me feel good, too.

• 13:26Stephen J. Dubner?

  If there were a cause, can you tell us just kind of the general outlines of the cause? Would it be a kind of, you know, poverty alleviation?

• 13:35Richard Thaler?

  You know, I greatly admire Doctors Without Borders and they are one of the causes that we support, but I haven't really figured out what my personal cause is.

• 13:49Stephen J. Dubner?

  Yeah. Now, let me ask you this. Your wife, France, you've been married quite a while. I don't know how much credit you give her for being part of the familial team that produced this Nobel Prize. If you were to divide the prize, how do you think about divvying that up?

• 14:08Richard Thaler?

  Oh, you know, first you tried to prevent me from winning the Nobel Prize. Now you try to break up my marriage, Steve. You know, I used to think of you as a friend. And so I would say that France should get 120% of the after-tax money.

• 14:29Stephen J. Dubner?

  Good answer.

• 14:30Richard Thaler?

  And, and you should get minus 20%. And I think that would be a great solution.

• 14:42Stephen J. Dubner?

  Early in your academic career, and I hope you don't mind me saying this, it didn't appear as if you were destined for huge distinction in your field.

• 14:52Richard Thaler?

  I think that's fair.

• 14:53Stephen J. Dubner?

  Yeah, the undergraduate and graduate schools you went to aren't quite elite. Your place in the economic firmament was hardly guaranteed. So what happened? How'd that guy get to here?

• 15:10Richard Thaler?

  You know, I think I... So you're right. I don't think I was... Well, I certainly wasn't a great student. And I don't think I was a great economist in the way economists are usually judged. In the sense that I wasn't a great mathematician and my econometrics skills were not superb. So suppose there was an economics combine, like the NFL Combine. And they did all the stats on Thaler.

• 15:54Richard Thaler?

  No one would have drafted him. And so what I really ended up having to do to survive, and this sounds premeditated, and of course it wasn't, was to figure out a kind of way of doing economics that would be something I was good at. And had I not done that, I might well have not gotten tenure and gone off and, you know, maybe I would be competing with you in book writing.

• 16:33Stephen J. Dubner?

  You've summed up behavioral economics as a collection of, quote, "supposedly irrelevant factors" that when it comes to how people actually live their lives are in fact not irrelevant. Can you give an example?

• 16:48Richard Thaler?

  Sure, you know, one of the, one of the first things that I noticed back when I was a graduate student puzzling through the behavior I saw was that people don't follow the economist's advice to ignore sunk costs. You know, if you paid for some expensive, rich dessert and after one bite, you were already full and your waistline doesn't really need it, but you remember how much you paid

• 17:27Richard Thaler?

  for it and so you think you need to eat it, following all kinds of mother's bad advice to finish what's on your plate, then you are failing to follow the economist's advice of ignoring that money because eating it doesn't get the money back. And so sunk costs are something that economists predict will have no effect on behavior. And there are a class of these supposedly irrelevant factors.

• 18:04Richard Thaler?

  In fact, it's almost the only set of things about which economists have precise predictions. So, you know, consider supply and demand. If the price goes up, people will demand less. Well, how much less? Oh, sorry, the theory doesn't specify that. All it says is less. So whereas here, sunk costs will matter precisely zero. So says the theory at least. In reality, you're saying they are a great deal, they matter a great deal. Right. That's why I call them supposedly irrelevant factors.

• 18:45Richard Thaler?

  You know, another example is default options. Which box is ticked on a form? That, again, according to economic theory, the cost of clicking the other box is infinitesimal. And yet, we know that making enrollment in a retirement plan the default option

• 19:12Richard Thaler?

  Increases enrollment rates to over 90%. And so, again, economists would predict confidently that that would have a zero effect and it has a massive effect.

• 19:28Stephen J. Dubner?

  In an earlier episode of this podcast called "How to Launch a Behavior Change Revolution", we heard Danny Kahneman, who won his own Nobel Prize in 2002, describe the history of behavioral economics. He pointed out something that distinguished Richard Thaler from many other economists.

• 19:43Speaker 04

  Now, Richard, he hates my saying the next two things I'll say about him. I mean, one of them I think he would tolerate. I think he's a genius. That's what he accepts. I think he's lazy. I've made him famous for being lazy.

• 20:04Stephen J. Dubner?

  You've been accused, or really praised, by your collaborator and mentor and friend, Danny Kahneman, as being extremely lazy. And furthermore, he argues that laziness has in fact been a big part of your success. What's he mean by that? And should we all try to be a little bit lazier?

• 20:23Richard Thaler?

  Well, you know, I don't know whether I can recommend laziness. And, you know, Danny insists in great earnestness that this was intended as a compliment. Although, he described it as my best feature. And I object to that. You know, I concede some laziness, but that being my best feature, really, Danny? You know? So I think what he means is that, well, at least I'm going to interpret it this way,

• 21:02Richard Thaler?

  that I have little patience for working on things that aren't, at least to me, both interesting and somewhat important.

• 21:19Richard Thaler?

  And so compared to to many economists or academics, I haven't written a super large number of papers. And I don't follow the habit of writing 20 versions of the same paper or the same on the same topic because I get bored. And the fourth paper on some topic is not nearly as interesting as the first one. So Danny claims that it's my laziness that forces me to work on things that are important rather than unimportant.

• 22:03Richard Thaler?

  And and that's his story, anyway.

• 22:06Stephen J. Dubner?

  And the mechanism of that benefit is what? Because you're lazy, you just don't want to waste time on things that aren't going to be potentially important and or interesting?

• 22:15Richard Thaler?

  Yeah.

• 22:16Stephen J. Dubner?

  Yeah.

• 22:17Richard Thaler?

  That's the idea.

• 22:18Stephen J. Dubner?

  So that I hate to inject our personal history in this, but it does bring up a memory is I remember coming to visit you in in Chicago. I think it was the first time we met and it was probably 15, 16 years ago. And I had really fallen hard for this whole behavioral idea, Kahneman, Tversky and Thaler. And I like the economics. I especially like the psychology. And I came to you and I said, Herr Professor Thaler, I, a young and ambitious journalist at the New York Times, would be most interested in writing a book that incorporates your research and incorporates your own view of the world. And I'd love to include you in it as some kind of collaborator, subject, so on. And if I recall correctly, I'm just curious to know what your recollection is.

• 23:03Stephen J. Dubner?

  You basically said, hmm, that sounds like a lot of work and I got other stuff going on, so I'll buy you lunch, but then scram. That was my recollection. And I've always been disappointed that we never worked on a book together. I'm curious if that squares with your recollection.

• 23:17Richard Thaler?

  Yeah, it really is too bad for you because when you got done with me, you said, I'm going over to the economics department to talk to this young guy Levitt. And then I think you abandoned the idea of writing a book with me because sumo wrestlers are more important than mental accounting. But my recollection of this story was that I thought maybe I had a book in me. And eventually I did.

• 23:56Stephen J. Dubner?

  Obviously, you did. You had two more and maybe more beyond.

• 23:59Richard Thaler?

  Yeah. So, you know, this is the tallest midget theory, but, you know, by economist standards, I write well. And so, yeah, I thought that maybe I should write a book and that it should probably be in my voice. And it worked out well for all three of us.

• 24:21Stephen J. Dubner?

  I do agree you write well, even not even for an economist. You're a good writer, but in economics, it especially stands out. I read a piece of yours recently that I would recommend to everybody. It was published in, I believe, JPE, Journal of Political Economy. And it was an essay about the history of behavioral economics. And this was so interesting to me. You write that it nearly got fully underway at the University of Chicago about 100 years ago, but didn't catch on. Can you talk a little bit about that?

• 24:52Richard Thaler?

  Yeah. So, the background is the University of Chicago House Journal, Journal of Political Economy, one of the top five journals in the world. They were celebrating their 125th anniversary, and they asked a bunch of Chicago faculty members to write short essays on their field and how it's been represented in the journal. And for behavioral economics, there were pretty slim pickings. But there was this article written exactly 100 years ago in 1918.

• 25:31Richard Thaler?

  By a guy called John Maurice Clark. He was the son of a more famous guy, John Bates Clark, for whom an award is named. And he writes something like that the economist can try to invent his own psychology, but it will be bad psychology. And if they want to stick to economics, they should borrow their psychology from psychologists.

• 26:02Stephen J. Dubner?

  Clark, you write, ends up leaving Chicago for Columbia. And you write, "It seems fair to say that the subsequent editors of the JPE did not take up his call to arms, which was essentially to integrate psychology and economics." Why did it take so long, do you think?

• 26:17Richard Thaler?

  Well, you know, I don't know really what was going on in 1918. But it is the case that economics was behavioral. You know, Adam Smith was a behavioral economist, for sure. And Keynes was a behavioral economist. The single best chapter on behavioral finance was written by John Maynard Keynes in The General Theory, which was written in 1936. So I think until World War II, there wasn't something called behavioral economics, but economics was kind of behavioral.

• 27:00Richard Thaler?

  And then what happened is there was a mathematical revolution that took place right after World War II. And it was led by people like Paul Samuelson and Kenneth Arrow. And Samuelson, in particular, he was a University of Chicago undergraduate and then went off to graduate school. And his thesis was called Foundations of Economic Analysis. So all he did was redo all of economics properly.

• 27:41Richard Thaler?

  And so, starting with that, economists got busy writing down Greek letters and formalizing economics. And it turns out the easiest way to do that is to describe behavior as some kind of optimization problem. Because if you've taken a high school calculus class, then you know how to solve for the maximum. You take the first derivative and

• 28:19Richard Thaler?

  set it equal to zero and you're done. So it was the bounded rationality of economists, ironically, that led them to make everything rational.

• 28:35Stephen J. Dubner?

  It's interesting because a lot of the hallmark anomalies, I guess, identified in recent decades by people like you and Kahneman, Tversky. We talk about loss aversion and mental accounting and the endowment effect and all the cognitive biases, recency bias and status quo bias and the availability bias. You know, it strikes me that none of them actually even seem remotely new. I mean, can't you find most of them in Shakespeare? Can't you find them in, you know, Roman and Greek and earlier philosophy? Don't you find them in the Bible and other ancient texts? So if what you're describing now is

• 29:16Stephen J. Dubner?

  a kind of mid-century modern renaissance of a sort of more holistic thinking about economics that was there from Adam Smith onward until World War II, I guess the real question is, is that really worth a Nobel Prize to have rediscovered this rich, rich, rich tradition of people say they want to do one thing but often do another?

• 29:43Richard Thaler?

  Yeah, I think it's the sort of thing that your mother might say, really? You make a living doing that, you know, much less a Nobel Prize? So, I mean, I guess it's fair to say that just pointing out that people aren't all that smart would not get you a Nobel Prize. You had to do something with it. And that turned out to be more work than I liked. But yeah, there was a long debate. And by no means have I convinced everyone.

• 30:25Stephen J. Dubner?

  Well, you were once asked about the degree to which, quote, mainstream economists have embraced behavioral economics. And you said, I don't think I've changed anyone's mind in 40 years. You basically don't change minds, given that I've turned to the strategy of corrupting the youth. And indeed, there are a lot of young economists really interested in behavioral stuff. Is that really true? Did you really change no minds? And if so, or even if not, I guess, what have you learned about the human capacity to change a mind? I mean, we don't want to just write off anyone over the age of 25, do we, as incapable of entertaining new thoughts?

• 31:03Richard Thaler?

  Well, it's hard. So I think Richard Posner, the great judge, I think he's changed his mind a bit. But I think it is hard to change people's minds. But economists in graduate school now, they don't have a big sunk cost in the traditional methods. There was an economist once, early in my career, who said to me, you know, if you're right, what am I supposed to do? What I know how to do is solve optimization problems.

• 31:45Richard Thaler?

  And I said, you know, I really, I don't know. I'm sure you'll think of something.

• 31:51Stephen J. Dubner?

  It's interesting, though, because if you look at the world writ large, political systems and healthcare institutions and so on, isn't that exactly the same core problem that we're facing, which is people come along with what could be really useful solutions, but institutions being what they are, the people with the power to change have often the least incentive to change. Isn't that a huge issue in the lack of progress?

• 32:19Richard Thaler?

  Well, I get what you're saying, which is if I'm at the top of the heap, why do I need to change? But on the other hand, it's often the CEO that is the most reluctant to change. And that guy, and he's unfortunately still usually a guy, potentially has a lot to gain from changing. I mean, if you think of companies that have come and gone, like Kodak, which invented the digital camera, but they had a almost monopoly in film

• 33:04Richard Thaler?

  and didn't really think this digital thing would go anywhere. And, you know, there are lots of blockbuster video, which came along and put tens of thousands of mom and pop video stores out of business, only to be put out of business by Netflix.

• 33:27Stephen J. Dubner?

  Coming up after the break. Wait a minute, the Nobel Prize in Economics isn't a, quote, "real Nobel Prize," is it?

• 33:33Richard Thaler?

  You know, it's a pretty good substitute.

• 33:36Stephen J. Dubner?

  What the award ceremony feels like if you're the one getting the award?

• 33:40Richard Thaler?

  I will say that I found the whole thing to be pretty emotional, partly because of where I came from intellectually.

• 33:51Stephen J. Dubner?

  And what's Thaler got to say about past and future economic meltdowns?

• 33:55Richard Thaler?

  You know, we seem to learn one lesson and then are not able to extrapolate it to the next one. I don't know what the next bubble will be or whether we're already in one.

• 34:16Stephen J. Dubner?

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• 34:59Stephen J. Dubner?

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• 35:20Stephen J. Dubner?

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• 36:08Stephen J. Dubner?

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• 36:45Stephen J. Dubner?

  In December of 2017, Richard Thaler went to Stockholm for a multitude of Nobel festivities.

• 36:52Richard Thaler?

  At the Nobel Prize banquet, one winner from each prize has to give a toast.

• 37:00Richard Thaler?

  Gives you a glimpse of the grandeur.

• 37:03Speaker 05

  It's a big honor to present the winner of the Nobel Prize, economics professor Alfred Nobel's son, Richard Thaler.

• 37:17Richard Thaler?

  So my toast began by saying that my fellow winners had discovered things like gravitational waves and circadian rhythms, and I discovered the existence of humans in the economy.

• 37:35Stephen J. Dubner?

  Then there were other events, including the Nobel lecture.

• 37:38Speaker 06

  Professor Thaler, please. The stage is yours.

• 37:46Richard Thaler?

  Thanks to all the members of the committee, and thanks for that great introduction.

• 37:56Richard Thaler?

  So I've been interested in gravitational waves for a long time. Oh, no.

• 38:06Stephen J. Dubner?

  In an earlier episode about the Nobel Prize and how to win one, we did speak with your colleague and our friend Steve Levitt, and he said-

• 38:15Speaker 07

  The way I know it's Nobel season is that around Chicago, a lot of people tend to get haircuts in the few days leading up to the announcement of the prize. And so if I see all my colleagues with really short, well-maintained hair, I know that the prize must be somewhere right around the corner.

• 38:31Stephen J. Dubner?

  So we have a question here from a listener named Aaron Wicks. He writes to say, "Dear Professor Thaler, did you get a haircut in hopeful anticipation of receiving your Nobel Memorial Prize?"

• 38:43Richard Thaler?

  No, I didn't. And I will also say that I've heard of economists and other scientists who set their alarm.

• 38:56Stephen J. Dubner?

  And then did they practice sounding sleepy?

• 38:58Richard Thaler?

  Like 3:45 so that they'll be alert, which I was the opposite of when the phone rang. And I'm a good enough amateur psychologist to know that this is a horrible idea. I mean, a really dreadful idea. So let's suppose my chances of winning were 1 in 20. Setting my alarm gives me a 95% chance of being awake to get the bad news.

• 39:34Richard Thaler?

  Whereas, you know, my strategy had always been to sleep soundly and then, you know, hear on NPR in the morning or now, you know, breaking news on your phone. Oh, isn't that nice? That Jean Tiro, a fabulous fellow, won the Nobel Prize and you can be happy about that. So, so, no, I didn't get a haircut and, and my alarm was not set.

• 40:08Stephen J. Dubner?

  In the very near aftermath of having been informed that you won the Nobel, you said this.

• 40:14Richard Thaler?

  And unlike Bob Dylan, I do plan to go to Stockholm.

• 40:19Stephen J. Dubner?

  And you did go to Stockholm. Tell us about that experience.

• 40:23Richard Thaler?

  Well, it's a week long marathon. The laureates are there for eight days of kind of constant interviews and dinners and.

• 40:36Richard Thaler?

  Talks and various things. And there's a hierarchy in the Stockholm prizes, the Peace Prize is given by Norway and is done in Oslo. And the hierarchy is physics, chemistry, medicine, literature, economics. And so my line is that among sciences, the Swedes consider economics just after literature. And that's because, of course, the economics prize, as we know, and as I'm sure some of your listeners will

• 41:16Stephen J. Dubner?

  Point out.

• 41:17Richard Thaler?

  Call in and inform you idiots, it's not a real Nobel Prize.

• 41:22Stephen J. Dubner?

  Right, well, before you go on with your, so let's just get it straight. The Nobel Prize in economics is not what they call an original Nobel. It was established in 1968 and it's officially called the Central Bank of Sweden Prize in Economic Sciences in memory of Alfred Nobel. But as you point out, a small but vocal contingent always seeks to remind us of this fact whenever the economic prize is referred to as a Nobel Prize. What do you say to that small vocal contingent that says, well, it's not really a Nobel Prize?

• 41:52Richard Thaler?

  You know, it's a pretty good substitute. And I will say the Nobel Foundation makes exactly no distinction. So you're all treated the same way. But because of this, this order, I spent a lot of time standing in lines and sitting next to Kazu Ishiguro, the literature winner, who was charming and wonderful. But I will say that I found the whole thing to be pretty emotional, partly because, you know, of where I came from intellectually.

• 42:34Richard Thaler?

  So, you know, as, as we were saying, I'm not someone that you would have predicted would be a Nobel Prize winner. And when that finally happened, that was, yeah, it was an emotional experience.

• 42:52Stephen J. Dubner?

  Are either of your parents still alive?

• 42:54Richard Thaler?

  No. They, they're very slow.

• 43:01Stephen J. Dubner?

  They the Nobel Committee you're talking about?

• 43:03Richard Thaler?

  Yeah, the Nobel Committee, you know, they're working their way through the 1980s. So that means that people are typically in their late 60s and early 70s when they win the Nobel Prize, which means there are very few parents that get to see their children win.

• 43:27Stephen J. Dubner?

  Who do you think was most proud of you?

• 43:31Richard Thaler?

  Danny Kahneman. Well, he was happiest. He kept telling me, "Come on, win this before I die." And he's 84, so, you know, he's a friend, so I had to do it, you know? The bribes were finally well worth it.

• 43:54Stephen J. Dubner?

  So, let's move on to talking about how behavioral economics has been applied by various people in various intensities in many different places around the world. So, you've said there are roughly 75 what are called nudge units, named after you or in Cass Sunstein's book, Nudge, about using behavioral economics in policy, essentially, policymaking.

• 44:16Richard Thaler?

  The latest number is 200.

• 44:18Stephen J. Dubner?

  Goodness gracious, that's a tripling in what span of time? Just a year or two?

• 44:24Richard Thaler?

  Yeah, I don't know, and I'm not the one keeping track, but someone at the OECD has a map with 200. Some of these are in-

• 44:36Stephen J. Dubner?

  Municipal-

• 44:37Richard Thaler?

  Cities, like, yeah, there's one in Chicago, for example.

• 44:40Stephen J. Dubner?

  All right, but what would you say, to date, has been the greatest, kind of specific contribution of behavioral economics? In other words, the greatest instance in which the research and the ideas have been applied to policy in successful measures?

• 44:58Richard Thaler?

  I guess you'd have to say retirement saving plans because 401k plans and their ilk, defined contribution plans have really been transformed because of behavioral economics research on two dimensions. One is changing the default, so what's called automatic enrollment. So you're in unless you actively take some step to opt out. That has gotten enrollment

• 45:34Richard Thaler?

  rates to be north of 90%. And then what my colleague Shlomo Benartzi and I called Save More Tomorrow, which is a plan where you ask people if they want to increase their saving rates every year until they hit some reasonable level. The generic version of that is now called automatic escalation.

• 46:04Stephen J. Dubner?

  So what that means is you get a raise and you contribute a higher percentage, but because you're getting a raise, you still are bringing home a little bit more money and you don't feel the pain? Is that the idea?

• 46:14Richard Thaler?

  Right. And, and you commit yourself to this often the future because we all have more self-control next month when, when we're going to start going to the gym every morning at six.

• 46:29Stephen J. Dubner?

  You've written that the, I'll quote you to yourself, "The subfield of economics in which the behavioral approach has had the greatest impact is finance." I'd love you to talk about that for a minute. You know, one thing I've never understood about behavioral finance is, you know, once the notion of behavioral anomalies is widely accepted, and they seem to be now in finance and in investing, aren't they just subsequently priced out of the market?

• 46:58Richard Thaler?

  Well, that's an interesting question. And the answer is, to some extent, yes. But I've been involved with a money management firm called Fuller and Thaler that's been around for 25 years or so. And the things we do don't seem to work any less well than they did 20 years ago.

• 47:26Stephen J. Dubner?

  I know Fuller and Thaler describes itself as having pioneered the application of behavioral finance to investment management, are your exact words. In what ways, just describe, in what ways is the firm's strategy actually behavioral?

• 47:42Richard Thaler?

  So, we're explicitly thinking about what are a class of situations in which people are likely to make a mistake. So, it's like, you know, you go into some restaurant and somebody's leading you to your table, and there's that one step down, and they say, "Watch your step." And they say, "Watch your step," because if they don't, you know, three people a night will fall down and they'll have lawsuits.

• 48:23Richard Thaler?

  So, you know, you can be a spectator watching that and say, "Oh, that guy is about to make a mistake." Now, you would have made that mistake, too. So, what we try to do is find those steps that are not quite in sight, that will throw a majority of market participants off.

• 48:54Stephen J. Dubner?

  Let me ask you a related question. This is from Colm Ryan, who writes that he's an accountant in Dublin, Ireland, related to what we've been speaking about and with very high stakes, I should say. So here's his question. Given that you could apply behavioral principles to help understand what led to the 2007 crash, do you see any similarities, or indeed differences, in what's going on in the world today? And before we let you answer the question, we should say that you, Richard Thaler, would seem particularly well-suited to answer this difficult question because in the film, The Big Short, Selena Gomez helps you explain synthetic CDOs, collateralized debt obligations.

• 49:37Stephen J. Dubner?

  Well, here's Dr. Richard Thaler, father of behavioral economics and Selena Gomez, to explain.

• 49:44Speaker 08

  Okay, so here's how a synthetic CDO works. Let's say I bet 10 million on a blackjack hand.

• 49:50Richard Thaler?

  10 million because this hand is meant to represent a single mortgage bond.

• 49:55Stephen J. Dubner?

  So first of all, was she a pretty good teacher? You understood CDOs better after that filming?

• 50:02Richard Thaler?

  Yeah, let me just say that Selena, unlike me, was very good at memorizing lines. And I think it's fair to say that, I mean, she was a very charming young woman. And I'm deeply grateful to her because being in that movie is the only thing that I've done that has impressed my granddaughters, who are big Selena Gomez fans. But I think it's fair to say Selena knew nothing about collateralized debt obligations, nor blackjack.

• 50:41Stephen J. Dubner?

  So she's a great actress, then, because the impression is that she knows quite a bit about both.

• 50:45Richard Thaler?

  Yeah, she's a much better actor than me. So possibly funny story is that in the script, the first hand, she's dealt a 21, which of course in blackjack means you win. And she was dealt 21 and didn't react. And so I had to take over as blackjack coach and director, both of which are uncredited in the movie, I might add, and say, Selena, when you get dealt 21, that means you win. And there's a shot in there where we're high fiving. And that's because she had learned in subsequent takes

• 51:28Richard Thaler?

  that when she gets dealt 21, that she's supposed to be happy.

• 51:32Stephen J. Dubner?

  Okay, so let's get back to Colm Ryan's question about the 2007 meltdown. And now similarities, differences, what do you see?

• 51:43Richard Thaler?

  Well, you know, I think, I don't think we will repeat that mistake.

• 51:55Richard Thaler?

  But that crisis followed pretty quickly after the tech crash in 2000, right? And it started like in 2006. So it's we're barely over the tech bubble. And we get this real estate bubble. And, you know, we seem to learn one lesson and then are not able to extrapolate it to the next one. I don't know what the next bubble will be or whether we're already in one.

• 52:31Richard Thaler?

  I do think that we have done some things to make banks less fragile, especially big ones.

• 52:41Richard Thaler?

  But, you know, there are things like Bitcoin around.

• 52:46Stephen J. Dubner?

  Of which you're not a fan, we should say.

• 52:48Richard Thaler?

  Of which I'm not a fan.

• 52:51Stephen J. Dubner?

  You're not not a fan of blockchain itself, correct? But as a currency, not a fan, is that about right?

• 52:56Richard Thaler?

  Correct. I mean, I don't know why anyone engaged in strictly legal activities would want to use a currency that is so volatile. It's just the opposite. You know, suppose you suppose you sell another book and the publisher offers you an advance in Bitcoin. Unless you were trying to cheat the IRS, you would say, no, tell me what it's going to be in dollars, because I could end up getting half of what you're offering me, and that's not an attractive feature.

• 53:35Stephen J. Dubner?

  So have you shorted Bitcoin?

• 53:36Richard Thaler?

  No, because, you know, Warren Buffett says a lot of smart things, and one thing he says is, don't make investments in things you don't understand. And I have no clue. I mean, I don't think that the intrinsic value of Bitcoin is worth thousands of dollars. But I also think it's entirely possible that it will go up rather than down. So stay away is the best advice.

• 54:12Stephen J. Dubner?

  Some people, including some economists, argue that behavioral economics is really just another way to suggest that individuals can't be trusted to make good decisions. And so institutions, particularly the state, should take more control. Indeed, your co-author on the book Nudge, a legal scholar, Cass Sunstein, for several years ran a White House unit called the Office of Information and Regulatory Affairs, which sounds about as Orwellian as you can. There are nudge units in dozens of federal governments around the world. You've described your work as libertarian paternalism, and furthermore argued that that phrase is

• 54:52Stephen J. Dubner?

  not an oxymoron. Why shouldn't we dismiss your work as a kind of new, softer form of statism?

• 55:02Richard Thaler?

  Well, I think, first of all, when we use this phrase libertarian paternalism, we're using libertarian as an adjective. And so we're trying to say, we're going to design policies that don't force anyone to do anything. So the claim that we're trying to tell people what to do, or force them to do things, is just completely wrong.

• 55:36Richard Thaler?

  We're also not trying to tell them to do what we think is smart. We're trying to help people do what they want to do. So I like to use GPS as an analogy of what we're trying to do. So I have a terrible sense of direction. And, um, you know, Google Maps is a lifesaver for me. Now, if I want to go visit you, I can plug in your address. And, you know, suppose I'm walking across the park and I see, oh, look, there's a softball game over there. I think I'll go watch that for a while.

• 56:21Richard Thaler?

  Google Maps doesn't scold me. Um, you know, it will, uh, recompute a new route if I've gone a bit out of my way. Uh, it doesn't suggest addresses to me. It just suggests a route. And if there's a traffic jam, it suggests maybe you should alter your route. So we don't think people are dumb. We think the world is hard. I mean, figuring out how much to save for retirement is a really hard cognitive problem that very few economists have solved for themselves.

• 57:02Richard Thaler?

  And it's not only cognitively hard, it involves delay of gratification, which people find hard. So it's just like navigating in a, in a strange city is hard. So why not try to help? When I first was working with the UK Behavioral Insight Team, the first Nudge Unit, the phrase I kept saying in every meeting with some minister was, if you want to get people to do something, make it easy. Remove the barriers. That's what we're about.

• 57:38Stephen J. Dubner?

  Let me go back to you and the Nobel. So what would you say have been, um, the biggest changes in your life since winning the prize, both of, of the observable sort and unobservable?

• 57:53Richard Thaler?

  Well, I mean, I think I spend more time talking to people like you. My inbox, my email is completely out of control. And there are some downsides, you know, the university all of a sudden has a lot of things that they would like you to do.

• 58:15Stephen J. Dubner?

  Fundraisers.

• 58:16Richard Thaler?

  Of that ilk. So I was a pretty happy guy. You know, you've known me for years. And we saw each other recently. Did I seem demonstrably happier?

• 58:32Stephen J. Dubner?

  You looked a little taller and better looking, but otherwise, I think that was my perception. I think you were exactly the same, actually.

• 58:37Richard Thaler?

  Yeah, that was, no, that was just your jealousy. But, but look, I absolutely don't want to sound like.

• 58:45Stephen J. Dubner?

  A sore winner.

• 58:46Richard Thaler?

  A sore winner or an ungrateful winner. I'm saying that most of the people who win were already pretty successful people with pretty good lives. And, you know, there's what psychologists call a ceiling effect. So I had a pretty happy life. As you know, I have a nice wife and I have kids I love. And, you know, yes, this made me happy and it was very gratifying. But you have this image that you're going to be on cloud nine. And, you know, then there's life.

• 59:31Richard Thaler?

  You know, you still get flat tires, even if you have a Nobel Prize. You know, you still have leaks at home that nobody seems to be able to fix. So, yeah, they need to fix that and say that if you get a Nobel Prize, nothing can leak in your house.

• 59:51Stephen J. Dubner?

  I'll end with where I should have started. Congratulations.

• 59:57Richard Thaler?

  Thank you, Stephen.

• 59:59Stephen J. Dubner?

  I, and I know everybody who listens to you is happy for you, proud of you, and most of all, we're pleased in a selfish way to keep learning from you because we learn a lot. And I thank you especially for that. And I look forward to the next time we speak.

• 1:00:15Richard Thaler?

  So do I.

• 1:00:21Stephen J. Dubner?

  Coming up next time on Freakonomics Radio.

• 1:00:24Speaker 09

  I don't believe it. This is, oh dear, this is really, this is, this is so, so, so, so sad. And I'll tell you, there's, there's some reasons besides what he did that made that choke so memorable.

• 1:00:42Stephen J. Dubner?

  Why do we choke under pressure? What's it feel like? For me, it was terrifying. And what to do about it?

• 1:00:50Speaker 10

  First of all, I will just say that I'm, I, I like placebo effects and, you know, I have no problem with that.

• 1:00:57Stephen J. Dubner?

  It happens in sports, it happens in school, while driving, while giving a wedding toast. It happens to you. Choking and how to stop it, that's next time on Freakonomics Radio.

• 1:01:10Stephen J. Dubner?

  Freakonomics Radio is produced by Stitcher and Dubner Productions. This episode was produced by Greg Rosalsky. Our staff also includes Alison Hockenberry, Greg Rippon, Harry Huggins, and Andy Meisenheimer. The music you hear throughout the episode is composed by Luis Guerra. You can find Freakonomics Radio wherever you get your podcasts. Our entire archive is available on the Stitcher app or at Freakonomics.com, where you'll also find transcripts, show notes, and so on. If you subscribe to Stitcher Premium, you will get every episode of Freakonomics Radio ad-free, plus lots of extra bonus episodes. So, go do that. Just go to StitcherPremium.com/Freakonomics and use the promo code Freakonomics to get one

• 1:01:49Stephen J. Dubner?

  month free. We can also be found on Twitter, Facebook, LinkedIn, or via email at [email protected]. Thanks for listening.

• 1:02:04Speaker 03

  Stitcher.

• 1:02:11Stephen J. Dubner?

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• 1:02:43Stephen J. Dubner?

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