Thought Leader Interview: Richard Thaler
You have described the goal of your research over the last 40 years as follows: “To introduce humans into Economics.” Please explain.
The truth is, the people who populate Economics textbooks bear very little resemblance to the humans we interact with on a daily basis. Standard economic models describe people who are as smart as the smartest economist, who are not affected by emotion, and who have no issues with self-control. That’s ‘Homo Economicus’; I call them ‘Econs’ for short — and I truly don’t know anybody like that. In reality, we do not have perfect willpower and we don’t always choose what is best for us — which is why obesity and insufficient retirement savings are so common today.
You have said that Daniel Kahneman and Amos Tversky’s Prospect Theory provides a ‘template’ for the type of theories we need today. How so?
As indicated, we struggle to determine what is best for us in the long run — and then, we struggle to have the willpower to implement that choice — especially if it entails delayed gratification. We sorely need economic theories that account for this, and the first such theory was Prospect Theory.
Traditionally, economists believed that every time we make a choice, the net effect of the gains and losses involved in that choice are somehow combined in our head to calculate whether a particular choice is desirable or not. However, Prospect Theory states that losses and gains are valued very differently by people — and this affects our
