The economist who had 'deviant thoughts'

Peter Day
Global business correspondent

image copyrightFrance Leclerc
image captionProf Thaler is a leading proponent of behavioural economics

What exactly is economics? Science or art? An explanation of our society based on observable, demonstrable laws? A framework for prediction? Or is it an attempt to systematise the unknowable - the mysteries of the human mind?

As an economics numbskull, I would plump for the latter.

Yes, you can generalise about human behaviour some of the time. But what a mess you get into when you think you have seen into the heart of things.

Economics is not sufficient I would say, and so would many people caught up in the great financial crisis of seven years ago. There must be something else.

These old thoughts are prompted by a new book from Richard Thaler, a professor at the University of Chicago's Booth School of Business.

The Chicago university connection may suggest the school of monetary economics that so inspired UK Prime Minister Margaret Thatcher in the 1980s - Professor Milton Friedman and his free market philosophies.

That same hard-nosed college is where Prof Thaler comes from, but he has other ideas. He told me about some of them when I interviewed him the other day about his new book Misbehaving.

The book charts the birth and subsequent biography of the economic concept which Prof Thaler has been instrumental in making mainstream: behavioural economics. The journey is a very personal story, written by what he calls a "certifiably lazy man". The story is often amusing.

Behavioural economics

Richard Thaler was a graduate student in economics when he began to have what he describes as "deviant thoughts".

Most economics in the 1970s was a discipline of rules, rooted in the idea of "homo economicus" - an assumed rational person whose actions and decisions are based on the optimisation of any choice presented to him or her. Hyper rationalism, Prof Thaler calls it. Mathematical.

image copyrightMARIANA BAZO
image captionProf Thaler says that consumers don't always make rational choices

The more that Prof Thaler thought about this, the more incorrect it seemed.

So he began to make a little list of cases where the economic decisions that people made were simply not rational - they considered it worthwhile to make a 10-minute journey to save $10 (£6.60) on a $45 radio, but not spending 10 minutes to save $10 on the $495 price of a television set.

Inspired by real world observations like this one, he began collaborating with academics skilled not in economics, but psychology.

Thus Prof Thaler and friends evolved the principles of a something different - behavioural economics, which - yes - takes into the account the way real people actually behave rather than those economic people - homines economici - with their mathematical minds that conventional economists were still working out their theories with.

And in spite of widespread opposition from conventional economists who resolutely defended the concept of economics as a mathematically precise discipline, behavioural economics became increasingly influential, inside and outside the halls of academe.

Nudging people

Prof Thaler is best known in Britain for the way that the ideas in his previous book Nudge (written with Cass Sunstein) was taken up by the last UK coalition government.

They advanced the idea that people don't have the experience to consistently make the correct choice in a complex modern world, but they do enjoy having the right to choose.

image copyrightGetty Images
image captionThe UK government has taken to giving people who haven't paid their tax a gentle nudge

Maybe there are ways to help people make good decisions, by giving them a bit of a nudge.

The government started a nudge group in Whitehall, the Behavioural Insights Team. The now famous example of its activities that we know about was the letter sent out by the UK tax authorities to people owing money to them.

"You are currently one of the small minority of people who have not paid their taxes on time," it said. With apparently almost immediate effect.

But the battle to change the economics playing field is not over, and Prof Thaler's new biography of an idea ends with one or two simple pleas for what you might call common sense.

He says: "It is time for everyone - from economists, to bureaucrats, to teachers, to corporate leaders - to recognise that they live in a world of humans, and to adopt the same data-driven approach to their jobs and lives that good scientists use."

Behavioural economics, he writes, is a three-fold process:

  • Observe... look at the world all round you; don't just see things as others wish them to be
  • Collect data on which to build observations... lots of it, not just anecdotes
  • Speak up. Don't be afraid to point things out that are demonstrably incorrect. Many people are intimidated by rank and position

In this way behavioural economics reconnects its practitioners to the real world after decades of the detachment from reality bred by many companies, organisations, professions. It's a rather important development in thinking.

Finally, don't take things too seriously. Right at the start of his new book Prof Thaler writes: "Stop reading this when it is no longer fun." This is an instruction I have never before encountered in a book on economics... or most others things, for that matter.

Peter Day's interview with Prof Thaler is due to be transmitted on Global Business on the BBC World Service on 18 June. It will also be available via the Global Business podcast page.

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