![]() This has important implications for analyzing, say, how an increase in income is going to change someone’s behavior. They are afraid that if the vacation home account is drawn down it will not be repaid, while the bank will see to it that the car loan is paid off on schedule." It comes, he writes, from “the household's appreciation for their own self-control problems. And what's more, Thaler notes that while economically irrational, this kind of accounting serves important purposes for people. It’s a violation of that mental accounting process to pilfer the funds for a car. The answer, Thaler argues, is that people tend to make economic decisions by budgeting certain money for certain purposes. J just use some of their $15,000 in savings to buy their new car in cash? That would save a significant amount of money, as the interest they’re paying on the car loan outstrips the interest they’re getting from their savings account. To an economist, this is pretty baffling behavior. They just bought a new car for $11,000 which they financed with a three-year car loan at 15%. The money earns 10% in a money market account. J have saved $15,000 toward their dream vacation home. In his landmark 1985 paper on mental accounting, Thaler opens with four anecdotes explaining the concept. Both of these explain behaviors that are hard to make sense of through traditional economic theory, but which should be familiar to anyone who has been, like, a human walking around in the world for a while. Thaler is perhaps most famous for his work on two kinds of economic irrationality: “mental accounting” and the endowment effect. People do accounting differently than economists - and that matters ![]() Thaler and his fellow researchers helped identified durable biases that could be modeled and used to supplement a purely rational model of human behavior. Rationality was always a simplifying assumption in economic models, and even if that assumption is implausible, it’s hard to dislodge without different, usable assumptions to put in its place. The real contribution of Thaler and other behavioral economics researchers, like psychologists Amos Tversky and Daniel Kahneman (a 2002 Nobel laureate), was identifying specific kinds of irrationality that could be predicted and modeled ahead of time. He joined the Chicago Booth faculty in 1995.The message of behavioral economics as a subfield, and Thaler’s work in particular, is sometimes summarized as “humans aren’t rational.” Economics has historically relied heavily on models of behavior where individual agents rationally pursue their goals, and so challenging that central assumption was crucially important, especially when Thaler’s most influential papers on the subject came out in the 1980s.īut “people aren’t rational” is, on its own, a pretty obvious point. Soon after, he attended the University of Rochester where he received a master's degree in 1970 and a PhD in 1974. Originally from New Jersey, Thaler attended Case Western Reserve University where he received a bachelor's degree in 1967. Thaler is a member of the National Academy of Science, the American Academy of Arts and Sciences, a Fellow of the American Finance Association and the Econometrics Society, and in 2015 served as the President of the American Economic Association.īefore joining the University of Chicago faculty in 1995 Thaler taught at the University of Rochester and Cornell as well as visiting stints at The University of British Columbia, the Sloan School of Management at MIT, the Russell Sage Foundation and the Center for Advanced Study in Behavioral Sciences at Stanford. He has published numerous articles in prominent journals such as the American Economics Review, the Journal of Finance and the Journal of Political Economy. He has authored or edited four other books: Quasi-Rational Economics, The Winner's Curse: Paradoxes and Anomalies of Economic Life, and Advances in Behavioral Finance (editor) Volumes I and II. In 2015 he published Misbehaving: The Making of Behavioral Economics. Sunstein) of the global best seller Nudge (2008) in which the concepts of behavioral economics are used to tackle many of society’s major problems. He investigates the implications of relaxing the standard economic assumption that everyone in the economy is rational and selfish, instead entertaining the possibility that some of the agents in the economy are sometimes human. Thaler studies behavioral economics and finance as well as the psychology of decision-making which lies in the gap between economics and psychology. Thaler is the 2017 recipient of the Nobel Memorial Prize in Economic Sciences for his contributions to behavioral economics.
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