Richard Thaler wins Nobel for Economics

October 9th, 2017 by Kara in News

Richard Thaler wins Nobel in Economics

Seven Pillars Institute congratulates Professor Richard Thaler on winning the 2017 Nobel Prize for Economics. Professor Thaler had kindly agreed to an interview with SPI and we republish the interview. He gave insightful observations about ethics in finance and how vitally important it is. No doubt if finance departments of business schools offer a financial ethics course (a rarity at the moment), their students would be better off as future investors and financiers.

 

SPI: Your book, Misbehaving:The Making of Behavioral Economics is among Inc.com’s 10 best business books for 2015. Can you tell our readers what the book is about?

RHT: The title has two meanings.  The first refers to my discipline, behavioral economics.  In standard economics, the unbehavioral kind, people are assumed to have supernatural powers of computation and infinite willpower.  They always make the “right” choice. Of course such people do not exist except in the minds of economists.  Real people “misbehave”.  And by spending my life pointing out these behavioral departures, professionally I have been misbehaving.  The book is the story, or rather series of stories, of how this field came into being, including the various intellectual squabbles along the way.  So it is a primer on behavioral economics accompanied by funny stories.  (I know, this sounds implausible.)

SPI: Why did you write this book?

RHT:  I had been telling these stories for years.  I thought it would be nice to write them down.  But as my friend Danny Kahneman is always reminding me, I am a lazy man (he claims it is my best quality.) I had to make the project fun in order to have the willpower to finish writing it.  So it was written in a way that amused me.  It was my hope that it would amuse others as well, and that in so doing, it would make the rather wonky subject matter easier to take.  From the (highly biased) sample of readers I have heard from, against all odds its highly unusual format seems to have worked.

SPI: For whom is this book designed?

RHT:  The book is intended for a general audience.  People who liked Thinking Fast and Slow, Freakonomics, or books by Malcolm Gladwell and Michael Lewis might like it.  It is a particularly good companion to Thinking, Fast and Slow which stresses the psychology part of the behavioral economics while I delve deeper into the economics.  Kahneman and I have now been working together for nearly 40 years.

SPI:  From a behavioral perspective, what is the role of ethics in finance?

RHT:  Once you admit that investors are not all as smart as Warren Buffett, the role of ethics becomes vitally important.  If investors, borrowers, home buyers and so forth are unsophisticated, then can be easily exploited by sophisticated hucksters.  Our recent history of dealing with the Great Recession should have taught us many lessons on how badly things can go if people in the financial sector misbehave.  This is all brought to life in the recent movie The Big Short, based on Michael Lewis’s book a movie in which I had the great fun of participating in a cameo role in a scene with pop-star Selena Gomez.

SPI:  How can behavioral economics help improve the ethics and ethical culture in financial services?

RHT:  There is too much to say about this to fit in a short interview but one thing to stress is that one cannot legislate good ethics.  So we need to take steps that will give ethical players a good chance of competing successfully against their unscrupulous competitors.  One step is to make everything as transparent as possible, and to take steps to create safe, easy to understand options for unsophisticated consumers.

SPI: Thank you Professor Thaler

 

Richard Thaler wins nobel for economicsRichard H. Thaler is the coauthor of the best-selling book Nudge with Cass R. Sunstein, and the author of Quasi Rational Economics and The Winner’s Curse. He is a professor of behavioral science and economics at the University of Chicago Booth School of Business and, in 2015, the president of the American Economic Association. Professor Thaler was awarded the Nobel Prize for Economics in 2017.

 

 

 

 

 

 

2 Responses to “Richard Thaler wins Nobel for Economics”

  1. Jay October 9, 2017 at 2:42 pm

    Congratulations Kara on the interview!

    Yes it’s true that you can’t legislate ethical behavior, but after so many rounds of financial “innovation” led debacles, (think portfolio insurance and 1987, hedge fund leverage and quant models and LTC and the Asian Crisis, the internet/high tech hype and the 2000-2002 crash, and the latest and greatest “Great Recession”), it would seem that a litle thought would be given to legislating or prosecuting bad ethical behavior. Referencing our days at Merrill, recommeding a 100 shares of a stock the firm didn’t follow to a client would bring the wrath of the compliance structure down on you, but somehow bringing the planet earth to the edge of financial destruction doesn’t even get one a slap on the wrist.

    The bankers and the street were and continue to act in their vested self interest and somehow the public continues to pick up the bill time and time again. Think about the cost to debt holders of 0% interest (negative in many parts of the world) for 8 years. Think about the cost to profit margins of underpriced capital. Think about the cost to successful business people competing in an environment were failure is bailed out and kept around.

    The street and the bankers have political cover and they know it. Somewhere in the last few decades, the political report card became the value of the S and P and our houses. Regulation gets tons of lip service, but no teeth as bankers and politicians sleep in the same bed and get paid(re-elected)by the same “grade”.

    Bad for capitalism, free markets, freedom in general, and ultimately the markets, as asset values that live by the sword(of government interference), die by the sword…

    • Kara October 9, 2017 at 2:56 pm

      Thanks Jay! Bad ethics is bad for capitalism. Trust is the lubricant that keeps markets operating well. Erosion of trust leads to erosion of properly functioning markets.