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.
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 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.