An Economist Who Blazed a Trail That Changed the Lives of Millions

About seventy years ago then-President Harry Truman
declared that if one were to line up all the economists
end-to-end, they would all point in different directions.
The 2017 Nobel Prize committee gave their economics
prize to an economist who spent the last forty years
showing that people don't act, in the investing sense,
the way that most economists have long said they do.
Moreover, this economist has enabled millions of
people to save more money than they thought they
could.

Over forty years ago two Israeli psychologists,
Amos Tversky and Daniel Kahneman, had exploded
the long-held idea that people are "rational" in a
series of experiments. Many economists, however,
stubbornly clung to their notion of people's
"rationality" for dear life. Professor Richard Thaler,
in a series of brilliant and amazingly humorous articles
published in highly respected academic journals since
the early 1980s, posited that people think the way
economists think they think, rationally and disciplined.
Instead, non-economists think like the human beings
that they, first and foremost, are: inconsistently,
distracted by secondary things of less importance,
emotionally. In other words, typically human in
thought and resultant action. Furthermore, Prof. Thaler
pointed out that most economists think like the human
beings that they, too, in fact are. In summation, he
showed that human and financial behavior is much
less orderly and much more complicated than is
presented in traditional economic models.

An economist thinks that everything is about incentives
and information; Prof. Thaler demonstrated that financial
behavior is mostly a matter of faulty self-control.
Rather than deciding on their goals and investing in a
diversified portfolio likely to net the highest possible
return on investment for an acceptable risk level,
people often can't act on their own investment ideas,
figuring "Why invest today when you will have still more
money to invest tomorrow?". This shows that people
are more procrastinators than investment managers,
according to Stephen Utkus, head of the Vanguard
Group's Center for Investor Research.

If  prospective investors are signed up automatically for
a 401(k) retirement plan rather than asked whether they
would like to sign up, 90% of them would stay with it.
Convince them to invest more when they get a raise
and they won't miss the money from their paychecks.
Thanks to Prof. Thaler's research, over 15 million
Americans are saving more for retirement. This, notes
Mr. Utkus, is a very conservative estimate.

Congratulations to Prof. Richard Thaler for his being
awarded the Nobel Prize in economics. In reaction to
having so been informed, Prof. Thaler quipped at a
press conference "I basically have made a career stealing
ideas from psychologists!". Would that the Nobel Prize
people also had a prize to award for possessing a keen wit.


MEM