Published: 04:18 AM, 10 July 2020
Richard Thaler: The Father of the Behavioral Economics
It was 12 September 1945, the sky of the whole world was covered with the black cloud of World War II. At such a moment, a child was born to a Jewish family in East Orange, New Jersey. A few days later, the war stopped and the whole world started to reform and covered with the shower of peace.
The child is none but the Father ofthe Behavioral Economics, Nobel laureate Richard H. Thaler. He was born in a solvent family and grew up with two younger brothers. His mother, Mrs. Roslyn, was a teacher and later she became a real estate agent. His father, Mr. Alan Maurice Thaler, was an actuary at the Prudential Financial in Newark, New Jersey and he wanted his son will follow his footsteps.
But, Thaler did not do that. From his childhood, he wanted to be a Psychologist. He married twice in his life. From his first marriage, he has three children. Later, he married, France Leclerc, an avid photographer and a former professor at the University of Chicago.
Thaler’s education life is quite diversified. He kept good signs at all levels of his education life. Thaler completed a graduation degree from Newark Academy before receiving his B.A. degree in 1967 from Case Western Reserve University and his M.A. in 1970. From the University of Rochester, he received his Ph.D. degree in 1974 writing his thesis on "The Value of Saving A Life: A Market Estimate" under the close supervision of renowned professor Sherwin Rosen. Like his education life, his professional career is also diversified.
After completing his studies, Thaler started the journey of his career at the University of Rochester as a professor. After this, he spent a year, from 1977 to 1978, at Stanford University collaborating and researching with Daniel Kahneman and Amos Tversky. At this time, he identified the theoretical framework to fit many of the economic inconsistencies, such as the endowment effect.
Then he served at the SC Johnson College of Business at Cornell University as a faculty member for a long time, from 1978 to 1995. During this period, he wrote many columns in the Journal of Economic Perspectives and drew big attention. These columns were published as a book named The Winner’s Curse by Princeton University Press in 1992. In 1995, Thaler was offered a distinguished position at the University of Chicago's Booth School of Business where he has taught ever since.
He also served at MIT and Cornell University. During his whole academic life, Professor Richard H. Thaler has written many research articles, book chapters, and books. Most of those writings are about behavioral issues. Among those writings, two books became a very popular sensation. The first one is Nudge: Improving Decisions about Health, Wealth, and Happiness. It was published in 2008 and co-authored with Harvard Law’s Cass Sunstein.
This book turned Thaler into a public intellectual and one of the best-known economists of the day. Motivating by this book, Britain’s government opened its “nudge unit,’ or more properly the Behavioural Insights Team, to nudge Britons toward wiser decision making and the United States under President Obama fired up its version of the nudge unit, the Social and Behavioral Sciences Initiative. The second one is Misbehaving: The Making of Behavioral Economics which was published in 2015.
Professor Thaler was awarded 2017 Nobel Prize in Economics for his core contribution to behavioral economics. His contribution was at such a level which is completely beyond the traditional postulations of ancient economics. In this regard, the Chairperson of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2017, Per Strömberg, quoted “it’s not that economists believe everyone is rational.”
Thaler studied behavioral economics and finance as well as the psychology of decision-making which lies in the gap between economics and psychology. Moreover, he investigated the implications of relaxing the traditional postulations of economics that all agents in an economy are rational, instead of entertaining the possibility that some of the agents in the economy are sometimes human. Thaler showed how human traits systematically affect individual decisions as well as market outcomes by exploring the consequences of limited rationality, social preferences, and lack of self-control.
Thaler developed the theory of mental accounting to explain limited rationality. In this theory, he explained how people simplify financial decision-making by creating separate accounts in their minds focusing on the narrow impact of each decision rather than its overall effect. He explained ‘the endowment effect’ by the aversion to loss can interpret why people value the same item more highly when they own it than when they don't.
Thaler interpreted the phenomenon by ‘social preferences’. Thaler threw new light on the old observation of New Year's resolutions to explain a lack of self-control. He also shows how to analyze self-control problems using a ‘planner-doer’ mode. Thaler demonstrated how nudging may help people exercise better self- control when saving for a pension, as well in other contexts.
Besides teaching and research, Richard Thaler also worked as an Adviser of former US President Barak Obama to make the 2012 election campaign successful. He also served as the adviser of the UK’s former Prime Minister, David Cameron's Behavioral Inside Team. He was the President of the American Economic Association in 2015. Not only these works but he also made a film named The Big Short in 2015 that led to the 2008 financial crisis.
The contribution of Richard Thaler has built a new bridge between the economic and psychological analyses of individual decision-making. This ideology has generated a new hub of research in Economics. For this reason, the world will remember him over the decades. The writer is a Lecturer in Economics, Rabindra University, Bangladesh and a Director, BK School of Research.
