Prize Lecture: Richard Thaler, The Sveriges Riksbank Prize in Economic Sciences 2017 | Summary and Q&A

Summary

In this video, the speaker discusses the path of behavioral economics and its application in various scenarios. He shares three stories that led to his research in behavioral economics, including the concept of self-control, loss aversion, and the sunk cost fallacy. He also explains how the use of heuristics can lead to systematic bias and the importance of supposedly irrelevant factors in economic theory. The speaker then introduces the concept of choice architecture, where the environment influences decision-making, and nudges as a way to influence choices without forcing anyone to do anything. He provides examples of nudges, such as changing defaults and using choice architecture to help individuals save more for retirement. The speaker also discusses the premium pension system in Sweden and its impact on investor behavior and the lasting effects of nudges.

Questions & Answers

Q: How did the speaker's interest in gravitational waves lead him to study behavioral economics?

The speaker began his inquiry into gravitational waves with stories and thought experiments. These stories and thought experiments eventually led him to the field of behavioral economics, where he explored the impact of supposedly irrelevant factors and the role of choice architecture in decision-making.

Q: What was the main lesson the speaker learned from the story of the economists analyzing the bowl of cashew nuts?

The main lesson from the story of the economists analyzing the bowl of cashew nuts is that having a choice removed can make individuals better off. Despite the economists' initial assumption that more choices are always preferred to fewer, they realized that they were happier without the choice to eat the nuts. This led to the exploration of self-control and its influence on decision-making.

Q: How did the story of the economics department chairman and the bottle of wine lead to further research on the endowment effect and loss aversion?

The story of the economics department chairman and the bottle of wine raised a puzzle for economists. While the chairman was willing to drink one of his old bottles of wine, he was unwilling to buy or sell it at certain prices. This led to the exploration of the endowment effect, loss aversion, and status quo bias, which resulted in a research program on how people value what they own differently from potential gains or losses.

Q: What is the sunk cost fallacy, and how did the story of the basketball game tickets illustrate it?

The sunk cost fallacy refers to the tendency to continue investing time, money, or effort into something simply because we have already invested in it, even if it does not offer value or benefits. In the story of the basketball game tickets, the speaker and his friend decided not to go to the game due to a snowstorm. However, their friend suggested that if they had already bought the tickets, they would feel compelled to attend the game, even if it did not change the fact that they had already spent money on the tickets. This led to further research on mental accounting and the impact of sunk costs on decision-making.

Q: What is choice architecture, and how does it influence decision-making?

Choice architecture refers to the environment in which choices are made, and it can significantly influence decision-making. For example, the structure of a menu or the layout of a store can impact what individuals choose or buy. By understanding how choice architecture influences decisions, behavioral economists can design interventions and nudges to guide individuals to make better choices without forcing them to do anything specific.

Q: What are nudges, and how do they help individuals make better choices?

Nudges are features of the environment that influence human behavior in a particular direction without forcing anyone to do anything. They leverage humans' tendency to be passive or make decisions based on defaults. For example, setting a default option for enrollment in a pension plan can significantly increase participation rates. Nudges can help individuals overcome self-control problems, loss aversion, and inertia to make better choices.

Q: How can nudges be used to encourage individuals to save more for retirement?

One powerful nudge to encourage individuals to save more for retirement is to change the default option in retirement plans. By automatically enrolling individuals in a retirement plan at a higher contribution rate, more people end up saving for retirement. Another nudge is to align saving decisions with future expected raises, so individuals do not perceive their income to be decreasing when saving more. These nudges can help individuals overcome self-control problems and inertia in saving for retirement.

Q: What is the save more tomorrow plan, and how does it leverage behavioral factors to help individuals save more for retirement?

The save more tomorrow plan is a retirement savings plan that invites individuals to save more in the future, leveraging their tendency for self-control to be easier for future commitments. The plan encourages individuals to increase their savings rate when they receive their next raise, reducing the impact of loss aversion. By aligning savings with future expected income increases, the plan leverages inertia to help individuals save more for retirement.

Q: How did the default option and the urging to choose their own portfolios in the premium pension system in Sweden influence investor behavior?

The default option in the premium pension system, known as a p7, became the choice for two-thirds of Swedish investors. The urging to choose one's own portfolio resulted in the remaining one-third of investors making their own choices. However, over time, the number of investors choosing their own portfolios decreased significantly, with almost no one choosing their own portfolios in recent years. This suggests that the default option and inertia play a significant role in investor behavior, while the urging to choose one's own portfolio had temporary effects.

Q: How long can nudges last, based on the premium pension system in Sweden?

Nudges can last for at least 17 years, based on the premium pension system in Sweden. Even after the urging to choose one's own portfolio ended and new entrants to the system did not experience the advertising campaigns, the majority of Swedish investors still remain in the default option. This suggests that the original nudge to choose one's own portfolio had lasting effects on investor behavior.

Takeaways

The speaker's research in behavioral economics demonstrates that supposedly irrelevant factors can significantly impact decision-making and outcomes. By understanding choice architecture and using nudges, such as changing defaults and aligning decisions with future commitments, individuals can be guided towards making better choices. Nudges can help individuals overcome self-control problems, loss aversion, and inertia, improving their financial well-being. Furthermore, the lasting effects of nudges highlight their potential to shape long-term behavior and highlight the importance of choice architecture in influencing decisions.