Richard Thaler: “The Behavioralizing of Economics” | Talks at Google

Published on Dec 9, 2015
Economist Richard Thaler visited Google’s office in Cambridge, MA to discuss the topic “The Behaviorializing of Economics: Why Did It Take So Long?”.

The talk is an introduction to his book “Misbehaving“. He points out that economic models are based on ideal entities he calls “econs”. But maybe economic choices are made by entities we might call “humans”.

Richard Thaler is an American economist and the Ralph and Dorothy Keller Distinguished Service Professor of Behavioral Science and Economics at the University of Chicago Booth School of Business. He is the coauthor of the best-selling book “Nudge” with Cass R. Sunstein, and the author of “Quasi Rational Economics“, “The Winner’s Curse“, and “Misbehaving: The Making of Behavorial Economics“.

Misbehaving Richard Thaler

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Welcome to Talks at Google in Cambridge, Massachusetts.
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Today it’s my great pleasure to introduce Richard Thaler.
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Don’t get too comfortable while you’re enjoying your lunch,
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because Dr. Thaler is here today to change the way you
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think about economics.
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In his newest book, “Misbehaving: The Making
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of Behavioral Economics,” he shows we
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wacky humans don’t, in fact, make the kind
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of rational decisions that traditional economics has
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assumed in creating its models.
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At first, these deviations from the assumed norm
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were dismissed, but now our miscalculations
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and their effects are the subject of serious study.
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The book couples recent discoveries
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in psychology with a practical understanding of incentives
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and market behavior to tell us how
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to make smarter decisions in an increasingly complex world.
1:05
Richard Thaler is an American economist and the Ralph
1:08
and Dorothea Keller Distinguished Service Professor
1:11
of Behavioral Science and Economics
1:14
at the University of Chicago Booth School of Business.
1:17
He is the co-author of the bestselling book “Nudge”
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with Cass R. Sunstein and the author of “Quasi-Rational
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Economics and the Winner’s Curse.”
1:27
Please join me in welcoming Richard Thaler.
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[APPLAUSE]
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1:35
RICHARD THALER: OK.
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Thank you very much for having me.
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The title I’ve chosen for the talk today
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is “The Behavioralizing of Economics:
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Why Did it Take So Long?”
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And this will give you a little taste
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of what the book is about.
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So it seems reasonable to start with a definition of what
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is behavioral economics.
2:00
And as one of my predecessors, Herb Simon, Nobel Prize winner,
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wrote this– the phrase “behavioral economics” appears
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to be a pleonasm.
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A free book to anyone who knows what that word means.
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It’s a redundant phrase.
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And so Simon is right, that it does
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seem to be a redundant phrase.
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Why do we need the adjective “behavioral?”
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What other kind of economics could there be?
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And then he answers his own question.
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The answer lies in the specific assumptions
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about human behavior that are made
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in neoclassical economic theory.
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So that theory is based on the assumption
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that agents in the economy optimize.
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They choose the best thing all the time.
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Is that accurate?
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So the idea is that economists think that the world is
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populated by people like Spock.
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[AUDIO PLAYBACK]
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-My choice will be a logical one.
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[END PLAYBACK]
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Cold-hearted, rationalizing optimizers.
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And I entertain the possibility that there
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are some Homer Simpsons around.
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[AUDIO PLAYBACK]
3:19
-Woo-hoo!
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[END PLAYBACK]
3:20
So how do they differ?
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3:25
The people that populate economic models I call econs.
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And they’re perfect calculators, rational expectations.
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They have no self-control problems.
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They never are on a diet, because they
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eat just the right amount.
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They never have hangovers, because they
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drink the right amount.
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And they’re complete jerks.
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Humans are dumber, weaker willed, and nicer.
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Here’s an illustration of the fact that they’re nicer.
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This is a picture I took in Ithaca,
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where I lived for many years teaching at Cornell.
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A farmer puts this stand up.
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This time of year, he was selling rhubarb.
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And it’s an honor box.
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You put in your money, and you take your rhubarb.
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Notice there’s a box here, and it’s got a lock on it.
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And I think the farmer has just the right model
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of human nature, which is there are enough honest people
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that it’s worthwhile for him to put the corn or rhubarb out
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there and enough people will put money in the box for him
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to be willing to do that.
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But if he left all the money out on a plate,
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somebody would steal it.
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When I first started teaching, I had the following problem.
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I gave an exam, and the students got mad at me.
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And the reason

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