“I doubt that financial debacles can be avoided”

By , in Science on .

When he was a young professor of microeconomics, Richard Thaler made a curious discovery: the same students who had been frustrated and angry because the average score on a test had been 72 out of 100, were delighted and happy when the average rose to 96 over a possible total of … 137 points. That is, 70% of the maximum grade.

The following years, Thaler maintained the heterodox evaluation system with the following warning highlighted in bold in the program of the subject: “This system has no effect on the grades you will get in the course, but apparently it makes them happier.”

What caught the attention of the 2017 Nobel Prize in Economics was that student behavior did not correspond to the idealized behavior model of economic theory, which is to assume that people choose and act by optimizing, based on rational expectations. Since then, his work deals with “the thousands of ways in which people move away from the fictional creatures that populate economic models,” he describes in his book, Portarse Malo. Irrational behavior in economic life. Thaler answered the Economic questions by mail.

What predictive capacity does behavioral economics have?

Human behavior is quite stable. In the end, we are not very different from our grandparents or grandparents. So, although the world changes rapidly with technology, and behavior changes on the surface (we look at our phones instead of talking to each other), the underlying psychology remains fairly constant.
Beyond eras and cultures “the underlying psychology remains fairly constant,” says Thaler. Photo: AP.

Beyond eras and cultures “the underlying psychology remains fairly constant,” says Thaler. Photo: AP.

And what role do local cultures play in economic behavior?

Of course, cultures vary tremendously throughout the world. You do not see people dancing tango on the streets of New York or Chicago! And these cultural differences can be important. However, the most important factors of human nature are quite consistent throughout the world, so many of the tools that work in London and Los Angeles, will also do so in Buenos Aires or Rio.

Is it possible at some point to avoid financial debacles?

I doubt it. It seems that we have a financial crisis once per decade, more if we look around the world. And although we learn lessons every time, they can often be about how to solve the most recent crisis instead of how to prevent the next. We continue to see what appear to be speculative bubbles, for example, in Bitcoin and other cryptocurrencies. Although I am not an expert in this, I do not see why anyone would use such currencies for legal transactions and as investments. They are more like games of chance.

In Behaving Poorly, you point out that organizations must adopt an approach similar to that of good scientists, based on empirical data. Why?

Psychologists have shown that the only way people learn successfully is by receiving quick and repeated responses. That applies to organizations too. But most organizations are too bad to collect data on past decisions. How many companies have systematically studied how they hire employees and if they are using the correct criteria? And how many do experiments? For example, unstructured interviewing is an unreliable way to predict job performance, but companies continue to use it. This is beginning to change slowly, but there is much more to be done on this front.

To what extent can behavioral economics serve to improve the working environment?

Once again, companies do not do enough experiments, so they continue to do things as they always have. What you can do is take new signatures, try different formats and ways of working. For example, a recent study found that giving employees more regular work shifts increases worker productivity and happiness. But you can not learn this kind of thing if you do not try new things and collect data and see what happens.

Pushes

In 2008, Thaler published with Cass Sunstein Nudge (Push), which shows how to help people make better decisions with small “psychological” pushes. Among his readers was David Cameron, who in 2010, as British Prime Minister, created a behavior team (Behavioral Insights Team) dedicated to apply behavioral economics to the design of public policies.
For the Nobel Prize in Economics, organizations are too bad to collect data on decisions made.