Officially, Richard Thaler won the Nobel Prize in Economics because he 'has incorporated psychologically realistic assumptions into analyses of economic decision-making. By exploring the consequences of limited rationality, social preferences, and lack of self-control, he has shown how these human traits systematically affect individual decisions as well as market outcomes'.
An interesting thing about this quote is that nudge doesn't get a mention; indeed, it only just about scrapes it into the Academy's official press release. (In the more detailed popular information document it doesn't appear until page 5 of 6.) This is in stark contrast to the popular press: the BBC leads with 'Nudge' economist wins Nobel Prize, the Telegraph leads with 'Nudge' guru wins the Nobel Prize, and so on. To read the papers you would think that Nudge is all there is to it.
There is no doubt that Nudge has been a huge success and made Thaler famous (at least by economist standards). In terms of the Nobel prize, however, it is important to recognize that Nudge is just one of the many, many contributions Thaler has made to economics, and behavioral economics. Let me pick up three of those contributions here.
1. Thaler showed how dumb people can be when making economic decisions. The likes of Herbert Simon, Amos Tversky and Daniel Kahneman paved the way by showing that people can make decisions that are inconsistent with the standard way economists think about things. They, though, typically considered settings that are pretty complex, such as, search, choice with risk or how to interpret information. Thaler took this one stage further and showed that even for the most basic of economic decisions the standard economic model can go astray.
Consider, by way of illustration the following example, from the classic paper on 'mental accounting and consumer choice':
Mr. S admires a $125 cashmere sweater at the department store. He declines to buy it, feeling that it is too extravagant. Later that month he receives the same sweater from his wife for a birthday present. He is very happy. Mr. and Mrs. S have only joint bank accounts.
Standard economic theory says that the sweater is either worth $125 or not. But, there seems nothing extraordinary about Mr. S's behavior. To provide a framework within which to make sense of this, and much else, Thaler introduced the notion of mental accounting where we code gains and losses, evaluate purchases and observe budgetary rules. Mr. S would be breaking self-imposed rules to spend $125 from his 'everyday account' but an occasional gift funded from the 'gift account' is to be enjoyed.
Once we see how easily the framing of a choice can influence behavior it is a relatively short step to Nudge and the idea that framing can be used to positively change behavior. (Crucial in this is also the recognition that people can have self-control problems.)
2. As well as dumb, people can also be nice, and not so nice. In many ways economists have clung to the notion of selfishness for much longer than that of rationality. Work by Thaler helped turn the tide. Two papers with Daniel Kahneman and Jack Knetsch on 'Fairness as a constraint on profit taking' and 'Fairness and the assumptions of economics' are particularly noteworthy. In the first paper we get a series of questions like the following:
A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20. Please rate this actions as: Completely fair, acceptable, unfair, very unfair.
82% of subjects considered it unfair. Presumably that means they may decide not to buy the snow shovel; fairness matters. In the second paper we get some big advances in the studying of the ultimatum game (first use of strategy method to look at willingness to reject and first look at willingness of a third party to punish) and we see the dictator game for the first time. This may sound a bit technical but it was part of opening up the whole debate on how fairness works and can be modeled by economists.
3. Popularization is not the kind of thing that wins Nobel prizes, but it can be important in driving things forward. In a series of articles published in the Journal of Economic Perspectives (and subsequently turned into the book The Winner's Curse) Thaler and co-authors set out some of the key insights of behavioral economics. I will quote in full the introduction to one of the articles:
Economics can be distinguished from other social sciences by the belief that most (all?) behavior can be explained by assuming that agents have stable, well-defined preferences and make rational choices consistent with those preferences in markets that (eventually) clear. An empirical result qualifies as an anomaly if it is difficult to "rationalize," or if implausible assumptions are necessary to explain it within the paradigm. This column presents a series of such anomalies. Readers are invited to suggest topics for future columns by sending a note with some reference to (or better yet copies of) the relevant research. Comments on anomalies printed here are also welcome. After this issue, the "Anomalies" column will no longer appear in every issue and instead will appear occasionally, when a pressing anomaly crosses Dick Thaler's desk. However, suggestions for new columns and comments on old ones are still welcome. Thaler would like to quash one rumor before it gets started, namely that he is cutting back because he has run out of anomalies. Au contraire, it is the dilemma of choosing which juicy anomaly to discuss that takes so much time.
The interesting thing about this is the target audience. This is about trying to convince economists that behavioral economics matters and should be taken seriously. That is a very hard sell indeed! But ultimately it seems to have worked.
With any Nobel prize there are going to be the critics. And I can already hear some grumbles. But, that seems to come more from ignorance than judgement. If we take Nudge out of the equation the contributions of Thaler are clear enough. With Nudge there is undeniably a lot of hyperbole from some policy makers and consultants. The undeniable truth, however, is that it has made a positive difference to policy making. That is worth celebrating.