The Frontman

Richard Thaler as the Bob Dylan of Economics

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Frontman (noun): a performer, as a singer, who leads a musical group. More generally, a person who serves as the nominal head of an organization and who represents it publicly. [Dictionary.com]

Richard Thaler is a rock star among economists.  Don’t take my word for it. See his cameo appearance in the film The Big Short (2015), sitting next to singer Selena Gomez in a casino, explaining the logic of synthetic collateralized debt obligations.

Or read his 2015 autobiography, Misbehaving: The Making of Behavioral Economics, “laced with antic stories of spirited battles with the bastions of traditional economic thinking,” as the book jacket says. All Thaler’s gifts are on display in Misbehaving:  he’s affable, witty, incisive, and more than a little bit pompous. Last week Thaler was recognized with the 2017 Nobel economics prize “for integrating economics with psychology.”

His story begins at the University of Rochester, and with Sherwin Rosen, an up-and-coming assistant professor who supervised Thaler’s thesis on some empiricxal evidence of the value to be placed on years of life by those spent working in various professions. “We did not expect much of him,” Rosen told an interviewer many years later.  Nevertheless, he helped Thaler publish a paper carved from the thesis in a National Bureau of Economic Research conference volume.

A post-doc year spent at the NBER office in Stanford, courtesy of health economist Victor Fuchs, proved eventful. There Thaler met Israeli psychologists  Amos Tversky and Daniel Kahneman for the first times, as well as, in Eugene, Oregon, Baruch Fischoff and Paul Slovic, University of Oregon psychologists who had first sparked Thaler’s interest in the pair.  Kahneman would share a Nobel Prize in 2002, after Tversky died unexpectedly, at 59, in 1996. In his job talks, Thaler spoke, not about measurements of the value of a year of life, but rather the ideas that would become “Toward a Positive Theory of Consumer Choice,” published in 1980 in the first issue of the Journal of Economic Behavior and Organization, and landed offers from Cornell and Duke.  He took the job at Cornell.

At first life was hard. Editor Joseph Stiglitz commissioned him to write a quarterly column. “Anomalies,” for the new Journal of Economic Perspectives. Fuchs last week recalled the reception of Thaler’s ideas: “Ridicule, scorn, laughter, [he was] sometimes fortunate enough to get just plain criticism.” Thaler’s papers in those days were derided as “odd, under-demonstrated,” Tyler Cowen wrote last week; they seldom appeared in top journals. “We need some of that Wackonomics,” said Orley Ashenfelder,” editor of the American Economic Review, inviting him to give a talk to a conference on economics and the law.

Thaler kept at it, cheerful and relentless.  A turning point came in 1985, at a conference at the University of Chicago organized by a psychologist, Robin Hogarth, and an economist, Melvin Reder. Thaler had gained tenure at Cornell; he had spent the year before working with Kahneman at the University of British Columbia.  In Chicago, Thaler and Tversky were thrown up against the heavyweights of the rational-actor wing of the profession – University of Chicago professors Robert Lucas, Merton Miller, Eugene Fama and, by now, Sherwin Rosen.

At the end of the two-day conference, which featured a version of Kahneman’s and Tversky’s  famous paper “The Framing of Decisions and the Psychology of Choice,” many persons attending had changed their minds:  “No psychology, please, we are economists” was becoming a joke. Ten years later, Chicago’s Graduate School of Business hired Thaler. Miller, already a Nobel laureate, wouldn’t make eye contact with him. Rosen joked, “I knew him when he was an economist.” (About the same time, Cornell economist Robert Frank, Thaler’s long-time fellow-traveler in heterodoxy, declined an offer from Northwestern University’s Kellogg School of Management, preferring to remain in Ithaca.)

If the prize is controversial, as Robert Shiller expects, it is not so much because some economists remain unconvinced that psychology has a place in economics, as Shiller wrote last week, as because so many have been convinced by persons other than Thaler.  Both Misbehaving and the Nobel committee’s paper on the scientific background of the award are characterized by a certain lack of generosity towards others who contributed to the acceptance of the new view, including, say, Ariel Rubinstein, Colin Camerer, David Laibson, Matthew Rabin, George Lowenstein, Sendil Mullainathan, Andrei Shleifer, and Ernst Fehr.

A case in point: the single most newsworthy piece of evidence in my memory was contributed by Brigitte Madrian and Dennis F. Shea, in 2001, in the Quarterly Journal of Economics. “The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior” quickly won the TIAA Paul A. Samuelson Award for outstanding scholarly writing on lifelong financial security. Thaler explains that he had broached its central idea– the advantages automatic enrollment for employees of companies offering defined-contribution savings plans – in a short paper called “Psychology and Saving Behavior,” in 1994.  But it was hard to “encourage take-up” of the idea, he writes, without proof that that it would actually work:

The problem was solved by a colleague at Chicago, Brigitte Madrian, who now teaches at the Kennedy School of Government at Harvard.  Brigitte wandered into my office one day to show me some interesting results she had obtained that were so strong that she could not believe them, even though she had crunched the numbers herself.  A company that had tried automatic enrollment asked Brigitte if she would analyze the data. She worked with an employee of the company, Dennis Shea, to see whether automatic enrollment was effective. The results were stunning, at least to Brigitte, who had received traditional training as an economist [at the Massachusetts Institute of Technology]. She knew that the default option was a [supposedly-irrelevant factor] and therefore should not matter. But she could see that it did.

In 2008, Thaler partnered with law professor Cass Sunstein to turn a joint paper on “libertarian paternalism” into a book. Nudge: Improving Decisions about Health, Wealth, and Happiness sold relatively few copies for Yale University Press in that election year, but Penguin turned a paperback edition into a best-seller after Barack Obama became president.   Sunstein went to the White House for four years as administrator of the Office of Information and Regulatory Affairs; Thaler became an informal advisor to British Prime Minister David Cameron’s  Behavioural Insights Team, AKA “the Nudge unit.” “Choice architecture,” their coinage, entered the language.

Even before, the rest was gravy. Thaler was elected president of the American Economic Association in 2014; he was succeeded by Shiller, his fellow specialist in behavioral finance, even before Thaler’s autobiography appeared. “The lunatics are running the asylum!” Thaler crowed. Misbehaving is dedicated to Stanford professor Fuchs, of the NBER, and Eric Wanner, then of the Russell Sage Foundation, the two men who gave Thaler his big chances; and to George Lowenstein and Colin Camerer, economists whose work he found inspiring.  Equally telling, in the acknowledgments he cites literary agent John Brockman and the “dream team” of other writers who read various drafts:  Freakonomics co-author Stephen Dubner, Malcolm Gladwell and Michael Lewis.

To Lewis, Thaler is “the man who realized how crazy we are.”  To journalist Roger Lowenstein (no relation to the economist), he has changed “what had become a dry and out-of-touch discipline” into “behaviorism,” which is more relevant and more fun.  Kahneman, meanwhile, famously said years ago that “the best thing about Thaler, what really makes him special, is that he’s lazy,” meaning, Kahneman quickly explained, that his friend  only tackles  problems  sufficiently interesting to overcome his native aversion to work. Thaler last week promised to try to spend the $1.1 million cash award that accompanies his prize “as irrationally as possible.”

.                                                             xxx

Some years ago, I distinguished between museum prizes and history prizes in those given in the economic sciences. The year before, the Nobel committee had cited New York Times columnist Paul Krugman, as much on the basis of his ongoing work on the financial crisis, I suspected, as for the work on international trade he had done thirty years before (we won’t know with any certainty until that year’s archives are opened in another forty years). In 2010 they had chosen Peter Diamond, Dale Mortensen, and Christopher Pissarides for some loosely-connected theoretical and empirical work on job search and unemployment. I wrote,

History prizes identify major turning points in the way that economic problems are conceptualized. Often their award makes news. Museum prizes are more like exhibits or installations. They are designed to showcase technical economics’ relevance to one problem or another, and tell something of how the community has worked together to address it.

I was reading Making and Effacing Art: Modern American Art in tha Culture of Museums, by Philip Fisher. I was struck by the use he made of Paul Valéry’s 1923 essay, “The Problem of Museums.” Valéry had written of their strange “organized disorder.”  A museum was a room wherein ten orchestras played simultaneously, he wrote, a room where from all sides works cry out for undivided attention.  By definition, I thought, museums are the province of the humanities; by their nature, histories of science belong as much to science as to history.  Museums exist to serve certain interests: collectors and galleries, on the one hand, critics and visitors on the other. Historians of science work mainly for one another, and, in this case, for the Royal Swedish Academy of Sciences, and for the Nobel Foundation and its funders, who pay the bills.

There is no such thing as a pure prize of one or another; always there are elements of both.  But since 2008, the museum approach has dominated the economics awards.  There was Krugman; then the political scientist Eleanor Ostrom and organization economist Oliver Williamson, cited for their work on governance, especially of common resources; followed in 2010 by Diamond, Mortensen and Pissarides. Alvin Roth and Lloyd Shapley shared the prize in 2012 for their work on matching and market design, as relevant as kidney transplants and school choice; Eugene Fama, Shiller and Lars Hansen, in 2013, for their differing opinions on why stock prices are what they are; Jean Tirole, in 2014, for his work on market power and regulation; Angus Deaton, in 2015, for his attention to global poverty, well-being and public health; and, this year, Thaler. Only two awards seem to have been history of science prizes: Thomas Sargent and Christopher Sims, in 2011, for contributions to methods of studying business cycles; and Oliver Hart and Bengt Holmström, in 2016, for contributions to the theory of contracts.

One way to understand this year’s prize is as the psychologists muscling in on the economics prize.  It was the psychologist Wanner who supported the 1993 conference volume on behavioral finance that put Thaler on the map. The problem with museum approach is that it may give a misleading impression of how economics moves forward. An alternative narrative might follow the trail of Sherwin Rosen’s landmark 1981 paper, “The Economics of Superstars,” one of those projects in mathematical reasoning on which Thaler’s adviser had begun working by the time the two parted company. The superstar skein probably would have been a candidate for a (history of science) Nobel prize in economics, if Rosen hadn’t died, at 62, in 2001.