Richard Thaler on Behavioral Economics: Past, Present and Future

that's fitting to be here at Carnegie Mellon to talk about behavioral economics in in some ways it started here and so fittingly I have a definition of behavioral economics that was written by herb Simon who was a legendary professor here for many years and he points out that behavioral economics appears to be a plea owned Azam now not only was Simon smarter than all the rest of us he also knew words that I know of us know if you know what that is then you get an extra credit in Aleks course it's so that word means redundant phrase and so he goes on to explain what he means by that which is well why do we need the adjective what other kind of economics could there be other than behavioral economics isn't economics supposed to be about the behavior of we economists call them agents but they're people interacting in markets that's what economics is so and then he answers his own question that the answer the question lies in the assumptions of neoclassical economic theory because well let me say what those are so the core assumption if you had to say what's the one thing that defines economics it is that agents choose by optimizing that so if you're gonna define the economic approach in a few words that's what it would be now economics didn't always be like that for example Adam Smith well-known economist not generally thought of as a behavioral economist wrote a big book George actually read this book so here are just three passages from from Adam Smith one about overconfidence one of the things they a verbal economist like to talk about the overweening conceit which the greater part of men have of their own abilities loss aversion pain is in almost all cases a more pungent sensation than the opposite and correspondent pleasure and self-control one of my favorite topics the pleasure which we are to enjoy 10 years hence interests us so little in comparison to that which we may enjoy today now if you know we made a top 10 list of behavioral economics principles these three would be there and here we have the person who's given credit for inventing economics he already had it so what happened why did we need to reinvent the field so it wasn't just Adam Smith I think economics was behavioral up through Keynes who was his magnum opus was written in 1936 I call him the inventor of behavioral finance here's just one passage the day-to-day fluctuations in the profits of existing investments which are obviously of an ephemeral and non significant character tend to have an altogether excessive and even absurd influence on the market well that sounds very true today and one of our co-conspirators Robert Shiller Yale is path-breaking paper demonstrated exactly this fact which was that prices stock prices seemed to fluctuate too much compared to what the theory said here's an another early behavioral economist vilfredo pareto who said boldly the foundation of political economy and in general of every social science is evidently psychology a day may come when we shall be able to decide the laws of social science derive the laws of social science from the principles of psychology now he's writing in in 1906 what psychology barely existed so he was doing a lot of projecting here but in some ways that's exactly the program of research that some of us have been working on for the last four decades finally let's get to the university of chicago view many people have heard of John Bates Clark the biggest prize the American economics Association offers called the John Bates Clark medal this is a quote from his son who was apparently a renegade member of the Chicago Economics Department why don't you just read that because it's kind of long okay so this is not only written by a Chicago economist it was published in the house journal the Journal of political economy and so I've been saying for years that behavioral economics is just borrowing good psychology rather than inventing bad psychology and that was the set out for us by John Maurice Clark so what are the defining assumptions of economics I'm gonna list these four I've already talked about optimization so of all the things we can do we pick the best one self-interest we care mostly about ourselves possibly family members though not always those and we have very little regard for anyone else third consumer sovereignty this kind of follows from optimization so people pick what's best for them and that implies though economists never really say there are no self control problems they just do economics in a way that leaves that out so if you say people always choose what's best for them that means they don't have too many drinks ever that no one is obese that everyone exercises just the right amount that everyone saves the right amount for retirement right so you won't find in an economics textbook the sentence we assume people have no self-control problems but that's implicit in in the theory and finally unbiased beliefs so people are not supposed to be omniscient but they're supposed to have what are called rational expectations' which means that we have the same expectations that a great economist trician like Linda Babcock would create in a model and all that means is they're unbiased okay so we all knew Trump was going to get elected now those four assumptions I mean that's what Simon was talking about it's those four assumptions that create the demand for behavioral economics and they describe Homo economicus the technical term for the people we've study I just call them icons and I say we should be studying humans instead of econ's now the question is to those assumptions apply to humans and that's what we're going to talk about today now let me start with a question about whether the idea that people optimize is even plausible I mean could it possibly be true and I would say no and why is that well some tasks are harder than others so I'll be everybody in this room can play tic-tac-toe perfectly I'm guessing no one in this room thinks they could have won the big chess match that was being held this week so we play easy games well maybe close to optimally and we don't play chess if if we were econ's chess would be a solved game and so either white would always win or black widow is win or would always be a draw they were close to always being a job but so that's point one point two people are different so some people are smarter than others some people are better at some things than others so assuming everyone is perfect and everything is an outrageous suggestion so for example and here I have a chart I should I should say that I have a former student who makes fun of my PowerPoint slides and insist on improving them and she added some editorial comment it's in the next two slides I'm going to show you so here's a list of tasks that degree that vary in their level of difficulty okay so breathing Rock Paper Scissors tic-tac-toe checkers chess mortgage shopping life-saving now let's suppose we have somebody really smart and since I'm at Carnegie Mellon will take from Simon now he he might be like this equally good at all things because if he couldn't chess well he was good at writing programs to play chess well so one way or the other using his own intelligence or artificial intelligence he would be a true econ what about me well here's here's what my assistant thinks okay now the same is true for self-control so here are a bunch of self-control tasks okay so here we have Gandhi I'm using me my assistant made these slides married a guy called Gandhi so her name is actually now Gandhi but so now again like Simon he would be perfect at all of these you know having perfected self-control what about me again okay so now this all seems kind of obvious I mean right you're convinced so why was there a fight and there was a fight because there were what our friend Matthew Rabin calls explain Oh Asians which is a great word so I've stolen it from Matthew and these are basically reasons why you needn't listen to people like us and George who's been doing this almost as long as me can tell you we've been hearing these arguments for a long time so one was coined by the great Chicago economist Milton Friedman and it's what we call the as if defense and the argument is yeah yeah we know that people can't really [Music] do solve those equations not everyone in the economy has had two years of calculus so they don't know how to solve for the life cycle savings solution but they behave as if and he tells this story about a billiard player an expert billiard player who plays as if he understood physics and geometry and so forth and so Friedman's argument was don't worry about the assumptions being realistic let's just look and see whether the models make good predictions and then we're off now notice Friedman was a brilliant debater probably the best economic debater of all time and he chose his examples carefully notice this is an expert billiard player he each owes if you've ever watched people playing pool in a bar they don't play that way right they aim at the ball they think is easiest to miss often and rarely think about what their next shot is gonna be so nothing like optimization but notice economics is supposed to apply to everybody not just experts right economic theory is not meant to be a theory of the behavior of economists it's meant to be a theory about everybody and we're not all experts furthermore the research of Daniel Kahneman and Amos Tversky two psychologists who kind of followed in the footsteps of herb Simon and made one huge intellectual leap from Simon so Simon's stressed that we are what he called boundedly rational bounded rationality was his term and what Kahneman Tversky showed in a brilliant series of simple experiments is yes we make mistakes and those mistakes are predictable and that was a big move because it says look these errors don't just wash out so our models are gonna be systematically wrong because people make mistakes that are predictable so what do I conclude from this the as if argument which held sway for most of the 20th century and still hold sway and some buildings at the University of Chicago was just a verbal sight of hand it it really carries should carry no weight people are not they don't behave as if they were maximizers now a second argument came about because much of the early research in behavioral economics and the research in psychology particularly Kahneman and Tversky all of their questions were hypothetical questions they what they really were were thought experiments with subjects and what I mean by that is as soon as you saw it you didn't really need to even see the data because you say oh yeah so you know it's suppose I ask you what's the ratio of gun homicides to gun suicides in the US most people would say 2 2 1 3 2 1 it turns out there's about twice as many gun suicides as gun homicides that's a predictable error and you say well why would that be while we read more about homicides than suicides okay now you don't need you'll take my word for it about the data right you just see how that can happen so so people but economists say look these are just parlor games there's no stakes we care about stakes now a second argument I often heard is well look you guys study things usually one-shot so you ask some question or you play some game once in the real world people get to learn and so maybe they won't start out smart but eventually they'll get really good at it like playing a video game or something now the first thing to notice is although I would often hear these two arguments from the same person they're mutually contradictory and the reason is that the things that are the highest stakes we do the least often so think about buying milk suits cars houses getting married saving for retirement right we're going up the scale of stakes milk you might buy twice a week houses maybe once a decade or two spouses most of us not more than two or three times so saving for retirement barring reincarnation you get one shot right so as we raise the stakes the opportunities for learning go down so you can't have both of these arguments you got to pick one and so another argument you know if it ain't broke you know economists particularly before the financial crisis used to say look our models are really good so why should we change and my line about this has always been that economists are easy graders now they might not be in the classes that you take but they are on themselves and and the reason is that many things that constant that economists call tests of economic theory amount to testing whether demand curve slope down in other words do people buy less of something if the price goes up well yes they do and but Gary Becker wrote a paper that I think I personally made him regret that he ever wrote it because I would bring it up frequently he wrote a paper showing that if people choose at random they have downward sloping demand curves I'll leave the proof of that to you as a homework exercise but that's true so the fact that demand curve slope down tells us nothing about rationality it just tells us that things are scarce and if you know if rents around here double and your income is the same you're not gonna eat as well and you'll live in smaller apartments there are fewer tests of magnitudes which would be really testing the theory very few there's one main one I can think of what's called the equity premium puzzle which was a paper published in 1985 showing that the difference between returns on stocks and bonds is way too big to be consistent with the standard economic model in fact off by a factor of 10 but we hardly ever have tests like that instead I mean if we use the easy grading test we'd say stocks are riskier than bonds stocks have higher returns and bonds victory right but you know let's push a little harder and say how much bigger and the problem is the theory rarely is precise enough to give us a test this particular model they test has the disadvantage of being testable so you know it doesn't seem like this is a particularly auspicious time for economists just to be declaring victory then finally we come to something I rudely refer to as the invisible hand wave and a here's the way it goes and why I call it that and I've heard some version of this many times as I'm sure many of my friends have and it goes something like this well yeah in your experiments people do something stupid but if they're out in markets then now here's where the hand waving comes in it's my claim that no one has ever finished that phrase keeping both hands in their pockets I don't it can't be done try it yeah then what you know suppose that George should have been a psychologist instead of an economist well what's gonna happen to him maybe he won't be as happy he'll end up making more money you know it's not that he dies right if we buy the wrong car or the wrong house or we suppose we save too little for retirement then we're gonna be poor when we're old very few mistakes are fatal and the markets just don't work this way there's no way markets have of transforming humans into econ's that's not the way markets work the important point is the this that it's much easier to make money exploiting a bias than eliminating in fact it's hard to think of any examples of people getting rich by teaching people not to make some mistake whereas people make lots of money exploiting other people's mistakes extended warranties are my favorite pet example good rule of thumb don't buy them Matthew Raven told me that he was offered an extended warranty on a memory stick that cost $10 you know don't buy there's a great Simpsons episode that you can look up that makes this point so okay what have we concluded so far the explain away sins are not a big setback we have better one-liners than they do so what should we do we should take the data seriously and it's fine to start with unrealistic models but then let's throw data at them and see what happens as for the role of stakes that's an empirical question do movement people make better decisions as the stakes go up do we think people are really good at saving for retirement getting married which is a 50/50 proposition so here's one way I investigated this there's lots of studies showing that people are not as big of jerks as economists give them discredit for and you probably all know the prisoner's dilemma game and you know that the Nash equilibrium in that game is for both people to defect if you run an experiment about 40 to 50 percent of people cooperate now there have been thousands of these experiments run first with zero stakes then with low stakes then with slightly bigger stakes so some colleagues of mine and I had a chance to study this at really big stakes and we did it by using a game show and it has the tantalizing title golden balls I didn't come up with that title so this was a Brit gameshow that started out with four people but narrowed down to two and at the end they play a prisoner's dilemma technically a weak prisoner's dilemma worked which worked as follows they had made some money and they could split or steal if they both split they each got half if one steals the other splits the steal or gets everything if they both steal they both get nothing okay so what happens if we had run this experiment it would have cost us 2.6 billion pounds which is like a trillion dollars so well not not anymore but but in in the individual shows the stakes ranged from a low of a hundred pounds to a high of a hundred thousand pounds there are a few of these you can find on YouTube the hundred thousand plus one is very much worth watching and there's another one you can find where a guy uses a very interesting strategy that I won't spoil but you can kill some time on that tonight so here's the question as we raise the stakes - really big what happens to cooperation rates do they fall to zero as economists have been arguing without any data for 50 years and the answer is sort of so here's the data and here's what I mean by sort of the cooperation rates do fall but they fall to the same level that we see in lab experiments for a dollar forty or fifty percent right you can see the this is like a thousand pounds and up we're getting forty to fifty percent cooperation rates you know the curve only goes down because they cooperate even more when we're playing for low stakes meaning a hundred pounds or two hundred and fifty pounds I called this the big peanuts phenomena meaning that if you're on this show and you think yeah I think I think the average was about five ten thousand pounds so you go in there thinking you're gonna be playing for a big pot and you only are playing for two hundred pounds so yeah that's peanuts now of course if we were running lab experiments with 200-pound stakes we would not think that's peanuts but in this context it's peanuts and people say well will I be a jerk on national television for a hundred pounds but otherwise there's just no evidence that racing mistakes changes well alright let's raise the stakes further I started doing research in finance excuse me precisely to answer this question figure let's go to the market where there's the biggest stakes and study that now there's something called the efficient market hypothesis which was invented by one of my Chicago colleagues and golf buddies gene fama and it has two components I call them the no free lunch component and the price is right' component no free lunch means you can't beat the market that's the one that jean cares the most about The Price is Right component is the one that I think is more important which is not only you can't be the market but prices are fair measures of intrinsic value so whatever the market value of Apple is right now that is the true price of Apple now for a long time financial economists had lived in the comfort of thinking that this part of the theory was untestable and there's nothing better in a theory than untestable 'ti you can find some little situations where you can test this and I'm gonna just show you one there are there are many but this one is amusing so yeah I've said this so there's closed and mutual fund let me stop for a second and say what a close to a mutual fund is most mutual funds the ones you used to are called open-end funds open end means they're opened a new business so if you send Vanguard a thousand dollars and say you want to buy the SP 500 index fund they buy that amount of stock a year later you say you want to sell it then they'll sell that many shares and give you back your money all trades are done at what's called net ass value meaning the prices of the securities that they've been holding for you a closed-end fund runs differently the organizers raised some money let's say a hundred million dollars and then they sell shares in the fund and the shares trade and the interesting thing and I've written a couple papers about these is that these funds don't always trade for the value of the securities they own which is weird because the securities they own is public so if I want to buy the stuff they own and the price is different then I just buy whichever one is cheaper ok now I'm gonna talk about a specific one of these it's called the Cuba fund and it has it as the ticker symbol see you BA but of course it has never invested in Cuba a that would be illegal B there are no securities okay so two pretty big problems investing in Cuba now historically this fund like most closed-end funds traded at a discount meaning you could buy a hundred dollars worth of their assets for $85 which is a good deal now I'm going to show you a plot the orange line is net asset value what the shares are worth you can see it's kind of flat during this period then you notice there's some funny thing going on there where all of a sudden the price of the fund goes to a seventy percent premium which means you'd have to pay a hundred and seventy dollars to get a hundred dollars worth of assets better you have any idea what caused that I can tell you that oh I don't have the year here yeah I know it's 2014 so yeah any guesses yes exactly so President Obama announces his intention to ease relations with Cuba keeping in mind that this fund doesn't own anything in Cuba but the shares jumped to a 70 percent premium and stay there for months it took almost a year for it to go away really efficient markets I showed this to Jean once he was annoyed now here's a something that just and here's oops here's this plot now updated to last week you see this well first of all notice it's been selling in a discount so things sir settled back down to normal what happened last week Fidel died right now a how old was he 90 right and he was barely alive for the last few years if people had rational expectations they would have thought he was gonna go any day his brother is running the company not him they come their country so it's really hard to see why Fidel dying a wasn't discounted into the prices and be again why should it okay so so it turns out you know this one's just amusing there are less funny ones that illustrate the same point now you know I think it's fair to say that after Obama's announcement there was a bubble in the price of the Cuba fund because if you really want to buy those stocks like I say you can go buy them they have like the Carnival Cruise Line I think is their biggest holding go by that you know and nothing happened to net asset value it's same with Fidel it's not like the price of the shares went up it's just I mean the price of the assets just the price of the shares okay well what about other cases this is a plot of the real estate bubble now you can see if we go back to 1960 the dark line is prices and the lighter line is 20 times rent and what you can see is real estate prices more or less track rental prices which is kind of what you'd expect right because you can buy you can rent so and that was true right up until about here where something weird happened and the dark the lighter line up there is a better measure of security prices that comes from the Case Shiller index that Bob Shiller helped create and so that's probably a more accurate measure but either way sure looks to me like prices went up and then prices went down and and that you could tell that at the time you can't tell when it's gonna end that's the unfortunate part so Fischer black famous financial economist who invented the black Scholes formula said that he thought prices were efficient meaning they were right within a factor of two I think if he had lived long enough he would have realized that two three but many important people have acted as if prices are always right and including alan greenspan who was warned by Bob Shiller that prices were getting irrationally exuberant and gave a famous speech where he uttered that phrase giving Bob a good book title but then he said yeah so you know I think price equals intrinsic value is a perfectly fine hypothesis the only problem has come is if you believe it now that so we can test this in financial markets which is the attraction of going there but then suppose we try and think about other markets so what about labor markets so do people get paid their worth so according to economics people get paid the value of their marginal product meaning what you produce the value of what you produce equals what you get paid now you know the Dean can tell you that means that what economists are teaching is obviously much more valuable than what philosophers are teaching for example according to that theory there you go that's why you had to become a Dean one for sale you know you walked right into that one you know so lots of you know lots of people have been talking about the fact that we have rising inequality it's not a recent phenomenon it's been going on at least since 1990 and pretty smoothly you can't blame it on any one president it's started it was certainly going on in the Clinton administration and in the George W Bush administration and in the Obama administration and the rich are just getting richer and everybody else is staying flat and that's true both in income and wealth now if you read a lot of the discussions about this the argument is well that's because the lower paid part of the population has become less productive or the ones that are making all the money investment bankers and plastic surgeons are doing something that's more and more valuable than it ever was now what if that's wrong it wasn't true for financial markets where we have arbitrage helping us set prices should we really be sure that it's true in labor markets what about rents what about luck I happen to go into the only kind of economics that I was any good at doing Linda can attest to that having written papers with me so that was luck you know suppose I had decided to become an economist in no so so that was luck so here's a long-standing puzzle which is there are big differences across industries in what clerical workers get paid so if your administrative assistant you make a lot more if you work at Goldman Sachs then if you do if you work at Carnegie Mellon University so David card has done some interesting work on this in Germany and let me just show you one chart here's the there are a lot of lines here but the only ones you really have to pay attention to are the red and yellow bold ones so here's the idea of this study he looks at individual workers that switch from a low-paid industry to a high-paid industry vice versa and so econometricians would call this individual fixed effects meaning we're studying the same person so you could say in my example of the administrative assistant well maybe Goldman just gets better administrative assistants and that explains it well here we're holding the people constant and what do you see if you're a lucky yellow guy that moves too that moves from 1 up to 4 your income goes way up if you're an unlucky red guy and you get down to a low-paying industry your pay goes down now that doesn't sound to me like a story about productivity and if that's right then I think we have to rethink the whole inequality debate now there's a part of that debate that's right it's clear we have to work on education and giving people tools I'm not disagreeing with that but if we're asking whether the people who are making the most like the people who are getting cabinet positions do they deserve it here's just an interesting graph of the ratio of CEO pay to typical worker pay from 1982 and you can see it's gone up like a thousand percent it's no it's going up 9 by a factor of 100 sorry so have CEOs really gotten that much better I don't know I can't prove it like the Cuba fund right I did the Cuba fund because nobody's gonna just say that was rational here I've got colleagues who will tell me this is all because CEOs have gotten so much more productive but I don't know okay so yeah there's no way to sell a CEO or even a department chair or Dean short so one last phrase I want to introduce supposedly irrelevant factors economists often have I told you that there aren't that many predictions about magnitudes because the parameters usually aren't specified we just say demand curve slope down but we don't the theory doesn't tell us whether it's steep or flat but economists have very precise addictions about some variables and the precise prediction is they won't matter at all okay and these are the things that I call supposedly irrelevant factors so here's a few of them that research has shown do matter some costs economic theory says you should ignore some costs humans pay a lot of attention to some costs the way a problem is worded some of condiment averse keys most stunning demonstrations were about that if you describe a problem in terms of live saved then you get a different answer than if you describe it in terms of lives lost it should no there's no definition of rationality that allows the answer to depend on the wording it's like if I asked you the same question in two languages that you understand do you like chocolate or coffee ice cream better you should give the same answer in Spanish in English right that's but that's what we're what we violate which options are designated as the default shouldn't matter when on United Airlines which I flew here this morning some of the planes have TV DirecTV and it's set to CNBC that's the default so you see Jim Cramer screaming at you on the screen unless you switch it and if you walk up and down the aisle three-quarters of the TVs are on that which isn't very much fun to watch with the sound off or on so so these are what I call supposedly irrelevant factors they come at or a lot here's an example now the standard economic theory of savings says people save the right amount right they optimize so they figure out how much they're gonna make over their lifetime what's the optimal consumption path how much do you want to leave to consume when you're old how much you want to consume now what rate of return you're gonna get on your investments and then your optimized people aren't very very good at that now suppose we change the default option about how much you're saving in a retirement plan or whether the default is that you're in or out so in traditional 401k plans the in order to join you have to fill out a bunch of forms people don't like forms so the idea propped up maybe we should just change the default give people a pile of forms and the top one says if you don't fill out this pile of forms you're gonna be put into the savings plan at this saving rate in this fund but you can opt out or switch it to something else now according to economic theory this should have no effect most of these plans come with a company match it's worth thousands of dollars to people to be in this plan filling out a form might be a pain but it shouldn't matter doesn't matter yes George notice those red lines now they're all around ninety percent so if you automatically enroll people into 401k plans about 90 percent of people join if you don't you get blue lines and notice this has a huge effect on low-income workers for low-income workers a little over 20 percent or joining if they have to fill out the form sorry it's only 87 percent for the poor but even rich guys are lazy if you do it by age again you get a chart that looks very much the same so this is a supposedly a relevant factor that matters hugely now there's a problem with automatic enrollment which is most firms default people into too low of a savings rate namely 3% now I'll tell you the story about how that happened it's an accident when automatic enrollment when the idea first was created and a couple companies had tried it and Brigitte majorie an economist who was then at Chicago now at Harvard wrote a paper about it we wanted companies to try this but they were afraid that it wasn't legal I asked a friend who was in the Treasury Department in the Clinton administration whether he could write what's called an advisory letter saying it's okay to do this so he wrote such a letter and the tradition in those letters is to give an example all right you can see where this is going so in the example he said suppose there's a firm that automatically enrolls people at a three percent saving rate the rest is history now this is almost 20 years ago I give a talk to 500 plan sponsors meaning companies who run pension plans and I asked how many of you use automatic enrollment most how many of you have 3% as your default saving rate most then I told them this story and there was a lot of embarrassment so how can we cure that well a former student of mine Norma Bernard C and I came up with the solution we call save more tomorrow and the idea is we all have more self-control in the future right many many of us are planning diets like after New Year's right not tonight so the idea was we would go to people and say would you like to save more later Oh later yeah sure so in the in the first experiment we ran they were offered advice and this option was only given to people who declined the advice to increase their saving by 5 percentage points so these were very reluctant savers here's what happened you can just look at this column no this is horizontal um you look at this one so these are the people who opted into this program you can see there were pitiful savers saving only 3.5 percent and when we capped them out they were at 13.6% so we know how to get people to say this is a solved problem we just have to convince companies to use automatic enrollment and generic version of this is now called automatic escalation not all companies are doing it more than half of big companies are but the big problem is with smaller companies and and half of Americans don't work at a place that doesn't have a retirement now a response I often got from economists as well maybe yeah you're tricking them into putting money over here but then they're just running up their credit card and we were worried about that I'm gonna stop in a minute don't worry we had no way of testing that because there was no us data set that had complete balance sheets but there's a young economist named Raj Chetty who writes a great paper once a month and annoys the rest of us greatly and with a group of Danish collaborators he was able to study this in Denmark where they have data on wealth so they have your total balance sheet and let me just show you a couple pictures so these are workers who switch companies to a plan that has a higher default saving rate and you can see their passive but what happens to the rest of their saving nothing nothing okay all right I'm gonna I'm gonna quit so I'm gonna go to the oh this is too good not to I've always had this theory that when people do their tax returns they do a tax return they do a first draft and then they see whether they owe money and if they owe money they get creative so that's what happens apparently in Sweden there's some deduction you can take that's bogus kind of like a home office and and so here's the percentage of people who take this bogus deduction as a function of whether they would owe money or not okay so all right all right here's I'm going to the so the what's the basic problem we're using one theory for two tasks we have a theory that tells us what the smart thing to do is and then we use that same theory to say what happens we need two different kinds of theories and really behavioral economics is all about developing that second kind of theory we don't want to throw away the first one in fact we couldn't do the second one without the first one okay so I'm looking for my last slide here's a slide of making everybody happy I'm gonna skip so so what do i as the talk was past present future future is one slide I say I advocate what I call evidence-based economics which is another rude term because you could ask what other kind of economics could there be but there yeah there could be axiom based economics so if everyone adopts that then I think that this new department will disappear and the reason it'll disappear is that it'll be the only economics department because all of economics will be as behavioral as it should be and I think that's all I have to say you

Channel: Carnegie Mellon University's Dietrich College

Views: 29,949

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Keywords: richard thaler, behavioral economics, carnegie mellon university, decision making, eocnomics

Id: TJrpN5INvcs

Length: 66min 6sec (3966 seconds)

Published: Wed Dec 21 2016