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Richard Thaler’s work demonstrates why economics is hard

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"Nudges probably won’t save the world, but whenever economists manage to deliver an actual improvement in real-world policy we should celebrate it. In some ways, however, behavioural economics is underappreciated: as in the way it reveals how difficult it is to understand all the factors affecting human behaviour—well enough, at least, to have a hope of explaining it." - Free Exchange notes.
OF course no theory will save the world. That is Truth #1 any scientist worth half a penny is cognizant of. If Economics regards itself a science, then it too shares the cognizance. Indeed, not doing so is the fatal error in Marxian Economics.
Second, regarding the human subject experiment to split $20, I submit IF the amount or size to be split is $2 million, you will likely obtain a startlingly different result. Which brings to mind the observation of an astute man: If you get a person to sleep with you for $20, he/she is a whore; if however, you get the same for $2 million or $20 million, or $200 million, etc.etc..... indeed $2 billion, $20 billion, $200 billion, etc.etc., the exact same transaction gains a very different appellation ("politician" comes to mind for this reader).
Thirdly, the new science called Behavioral Economics, IMHO, has barely scratched the surface. There are many many more miles to go. There is, at all times, active, vibrant, and in dynamic functional involvement on all dimensions of human intercourse, of which Economics makes a subject of inquiry on the dimension of $ exchange, something called the *Unconscious*, and the *Collective Unconscious*. Whether you reckon their existence or not, they are there.
This is no Freudian and Jungian talk, although the two discovered and coined the terms . You want to predict human behavior? Better get acquainted with these dynamic entities, instead of calling them quackery (once the Catholic Church called Galilee a witchcraft master). The unconscious is always in the works and at work, but folks deign to consider it - You know, the sort who accuse anyone and everyone who knows anything - anything at all - they don’t: "the loathsome ELITE". Fine. The loss is on the unknowing , incurious and totally uninquiring. Keynes, a mind Bertrand Russell thought smarter than Bertrand himself, learned to read Sanskrit, and to read the I-Ching. They were both very smart minds, I should think. Though a bit "elite".
Great article again for pointing out in crystal clear terms the gist of Mr Thaler's contribution to the field of behavioral economics. Thank you, Free Exchange.

ashbird in reply to jvictor1789

I think the market is not crazy. People are crazy.
I think craziness lies not in the line between rationality and irrationality. It lies in the tendency to lean in with herd think and herd behavior. If a mind insists on its own rationality, instead of going with the herd, the mind wins with a probabiliy much higher than 50%. It takes courage to think independently. Sometime courage is rewarded with a cup of hemlock. That is the price you pay. Nobody says the world is perfect. As Yogi said: If it is, it won't be.


Reading this article reminds me of how technically brilliant but philosophically idiotic economists can be. Yes, we humans are complex and our internal algorithms for decision making can be equally complex. Economic theories draw from over-simplified models, strong in numerical relationships but weak in the accuracy of their assumptions. I hope economists see Thaler's challenge to traditional models as reason to approach the field with a touch more humility.


People will continue to eat rubbish, study easy stuff like Arts, drink sugary poison, consume intoxicants, and spend too much. We have a choice to live like sinners in Christianity, unlike Islam. Nudges are for babies. I know whats best for me! I choose to be a failure

ashbird in reply to guest-theritz

Yes, @aaweslls. Thank you very very much indeed for your correction. I did know what the word meant. I chose it. I left out the "no" when I sped through with my 2-finger typing. Please forgive the sloppiness. And again, thank you abundantly for spotting the error.... Come to think of it, I thought I had added it with the Edit key. Apparently it DIDN'T work! I often returned with an erratum after my own post. That got to be tedious and, in fact, "annoying" for many readers. Pox on me for never having learned how to type properly. I really appreciate your pointing out the missing "no". It's important. Again, thank you.


I wonder if they tried the experiment where the decision the person made was not know by the rest of the class, it was a private decision. Peer pressure and status in a class for $8 extra seems to be a potential factor. Businesses do not make decisions on pricing products based upon fairness, its based upon supply and demand and maximizing profit. So I am having a hard time understanding how this would be played out in the real world? What if the person was given $100,000 dollars instead, would they then really give $50,000 to the other person? Value also plays a role.

jvictor1789 in reply to ashbird

Prejudice, capriciousness and ignorance twist economic decisions with dire consequences everyday.Psychology is thus central to understanding why markets are, from a classic economics point of view, often "crazy".
Resource misallocation as a consequence of mental imbalances...


Conservatives will never accept behavioural economics because they can't then point to simple and inaccurate "laws" that "prove" minimum wages are always bad. That taxes always cost jobs. That regulations always hurt productivity on so on. Conservatives will not abide a world of complexity. They need it simple.


What a strange article, though it casts a brilliant light on the absurd presumption that the future is predictable in any meaningful way and that economics is the "science" upon which such prognostications are made. I would have thought that delight is the true response to the ineffable mysteries of our condition.

Mike Hoy

So... how can one "qualify" as an economist when the dismal science can't even come to a consensus on what is what?


I wonder how much of this can be explained by Jane Austen's observation that people want different things.
"Homo economicus" wants money - the the most money, the best value for money, and the best return on money. But some other people want other things - admiration, political power, leisure, or to do good, or even just to feel good about themselves. Those desires may lead them to do things that make sense within their "economy" - the economy of admiration, say, where Veblen goods don't make strict economic sense.
But it's more complicated than that, because people change with changing circumstances. 2008 came, and suddenly a lot more people cared about strict economic calculation than did in 2006. And they cared more about avoiding loss, whereas in 2006, they cared more about not missing out on gains.
It might be reasonable, then, to try to come up with different broad categories of what people could want, and to figure out how they would behave economically if they wanted those things. Then you could try to find out what proportions of the population wanted each of those things, and could use that as a guide to what to expect. And when the circumstances change drastically, if you can figure out what the distribution of desires changed to in the population, then you'd have at least a rough idea of what to expect in the new circumstances. For an even better theory, figure out how the changing circumstances are going to change the proportions of desires in the population.

Noel Evans

> But it truly is a dismally frustrating one.
Isn't that an unnecessarily negative conclusion? The field is now recognised as broader than previously demarcated. It now encapsulates game theory and other concepts. Better to be an economist rather than in another field being subsumed by others.


the greatest tragedy to befall the most beautiful of sciences is this self denigrating self effacing attitude - just because you have not accounted for a factor in your equation - it does not debunk your existing body of knowledge. That attitude was and ought have remained strictly the purview of physicists and their ludicrous dreams of grandeur. How it came to befall Economics has to be one of the bigger crimes - the other being the creation of the nebulous state of 'econometrics'. if the existing body of knowledge does not account for Karma (for simplicity's sake) - or take a long enough view of things - it does not debunk the theory of utility maximization. how utterly ignorant/physics like. tragic. the beautiful science ought to remain beautiful/weed out the influence of these crazy useless... self doubts/fields.


I think behavioral economics' biggest contribution is less about the fundamentals of economics and more about simply recognizing that the utility function of human beings takes into account more than just quantifiable values -- it includes the (highly subjective) values placed on non-tangible benefits and non-tangible harms.
When individuals take into consideration things like "what would others think?", or "what does society expect?", "what does my god/creator want me to do?", or "how will the other guy react the NEXT time?", they are evaluating a host of non-tangible harms and benefits, the subjective value of which is nearly impossible to quantify. It should be noted that taking these subjective values into account is not contrary to the idea of "homo economicus" -- in fact, it would be IRRATIONAL to simply disregard these benefits and harms (in effect, arbitrarily reducing their value to zero), since they all clearly have a non-trivial, non-zero value even if it is next to impossible to quantify.
Classical economists can rightly extol the virtues of the "homo economicus" model, so long as everyone recognizes that when we talk about rational actors maximizing their utility, what constitutes "utility" as well as the value of that utility can be highly subjective and idiosyncratic.

guest-noewosj in reply to Realize

It is even more likely that actually you do not choose anything since chance has made it.
Christianity assumes the original sin that is just the radical world imperfection. The choice of living like sinners is the refusal of receiving the spirit and growing spiritually framing a set of appropriate values.

Prasad Dixit

The fact that short-term temptations dominate long-term planning is known to everyone. What Nobel scholars should try to explain is why people behave that way, and how to make them think differently. As long as there is competition, everyone would always worry how long one would survive that cut throat competition. Thus, if one is unsure of tomorrow (long term), one would always let priorities of today (short term) dominate all the time. Creating a system where there is no competition would invariably compromise quality and stagnate economic growth. How to address this dilemma should be the subject matter of research by Nobel scholars. Perhaps Governments all over the world have to play on these two emotions of fear and comfort in the people all the time – use competitive fear when people take it too easy, and provide some comfort and assurance when competitive threats cross a limit. This is pretty similar to the way an expert driver would ‘nudge’ accelerator and brake of a car while driving. The ‘nudge’, after all, is no different in that case than what we all do while driving!

LexHumana in reply to Prasad Dixit

"The fact that short-term temptations dominate long-term planning is known to everyone. What Nobel scholars should try to explain is why people behave that way, and how to make them think differently."
You won't ever be able to make human beings think differently. Short-term horizons versus long-term horizons are hard wired into all living creatures, and asking for that to change would require an evolutionary change in the species. The only time you can get people to refrain from seeking short term gain is when individuals can be persuaded that the long term gain is not only greater, but that the individual will actually receive and benefit from the long term gain in a value that is high enough to offset the immediate value of the short term gain.
In other words, a test subject might wait 15 minutes to get two marshmallows instead of taking one marshmallow immediately, because the cost of 15 minutes is perceived to be less than the value of an extra marshmallow, and the test subject knows that he or she will be the direct and immediate beneficiary of that extra marshmallow. However, asking someone to wait a year for an extra 1000 marshmallows may not be sufficient -- everyone knows the old adage "a bird in hand is better than two in the bush". Those 1000 marshmallows may never appear -- after all, a lot can happen in a year -- and the test subject may not end up being the final beneficiary of those extra marshmallows.
To get people to pay attention and value long time horizon events, three things must happen: (1) the cost of addressing the long time horizon event must be extremely low, and (2) the reward for the wait or forbearance must be extremely high, and (3) the person being asked to bear the cost must be the direct and immediate beneficiary of the reward.
Most social problems do not meet this criteria. For example, take carbon emissions and global warming. The immediate costs to obtain a long term solution are relatively high. Although we can argue that if those costs are diversified across a large enough population, they become individually trivial, it becomes difficult to actually diversify those costs equally (e.g. if a coal plant closes, those workers are out of jobs -- the immediate costs to them are extremely high). Second, while the rewards for reducing carbon emissions are certainly high in a theoretical context (health of the planet, etc.), they are nearly impossible to quantify in an economic context, at least to the extent that it can be quantified as a tangible "reward" to everyone in a dollar value. Third, the primary beneficiaries of the long-term benefit are not the individuals being asked to bear the short-term costs -- they are future generations that are decades down the road.
The only way to create a solution to long time horizon problems is not to wish for a change in human thinking, but instead to transform them into short time horizon problems. By doing that, you can create solutions that are low cost, high reward, and direct and immediate.