According to a fellow laureate, Richard H. Thaler, this year’s winner of the Nobel Prize in Economic Sciences, is a “controversial” but “wonderful”choice who has helped to bring behavioural economics in from the fringes of the discipline and shared its insights with a broad audience. We talk to four Maastricht University School of Business and Economics academics about Thaler’s impact on public policy, the role of behavioural economics in their own work, and its place in education at Maastricht.
How has Richard Thaler’s work changed economics and society?
“Thaler has made really significant contributions to the field showing how irrationally people behave… and he uses those insights to help influence public policies,” says Lisa Brüggen, professor of financial services at Maastricht University’s School of Business and Economics (SBE).
Arno Riedl, professor of economics at SBE, says Thaler “was instrumental in putting behavioural economics on the agenda. Relatively early, in the 1990s, he managed to get a series of articles, ‘Anomalies’ (meaning behavioural deviations from the standard homo economicus), into the prestigious Journal of Economic Perspectives.”
Riedl points to Thaler’s contributions in limited or bounded rationality; in self-control, especially in finance and consumer behaviour; and in consumer savings, particularly pensions.
“He showed that simple changes in choice architecture, like different default saving rates, can have a huge impact on actual savings behaviour, and in the case of pensions, can make the difference between wealth or poverty in old age,” Riedl explains.
According to Peter Werner, assistant professor of economics at SBE, “Thaler is one of the pioneers of behavioural economics, who integrated insights concerning behavioural irregularities in the field of economics. He not only conducted ground-breaking fundamental research, but was also highly influential with regard to the application of his insights in policy practice.”
Christina Rott, assistant professor of economics at SBE, adds that the 2017 laureate “contributed substantially to the understanding of human decision-making. I particularly like his work on how the fact that we dislike losses and that we tend to focus a lot on the present affects investment and saving decisions. He also proposed the redesign of institutions and uses nudges to help improve people’s choices.”
Does Thaler’s Nobel mean behavioural economics is now mainstream thinking?
Riedl: “It certainly helps, but behavioural economics is still far from mainstream. Writing in The Guardian, Shiller suggests that six Nobel prizewinners in economics could be seen as behavioural economists (George Akerlof, Robert Fogel, Daniel Kahneman, Elinor Ostrom, Shiller himself; I would also add Alvin Roth) and that this accounts for just 6 per cent of all Nobel prizes in the discipline. I would say this accurately reflects the number of behavioural economics articles in economics journals (certainly in the top ones). My conviction is that behavioural economics will be mainstream only once there is no need any more for the ‘behavioural’ in the term behavioural economics.”
Werner: “In my view, behavioural economics has been developed into a mainstream discipline in economics. The high acceptance of the field can be seen, among other things, by the large number of research publications in this area and by the increasing number of governments that establish institutions with the goal of integrating insights from behavioural economics into public policy.”
Brüggen: “Economists for a long time held on to models based on rational, utility-maximising agents. But Thaler’s insights, also inspired by research in fields such as psychology, led to the integration of psychological, social, emotional and cognitive factors into economic models. Behavioural economics has grown tremendously over the past years and is now widely accepted. Someone (it may have been Thaler) recently said that we can drop the ‘behavioural’ from economics since there are now so many behavioural economists that it is the default rather than an exception that requires explanation.”
What can behavioural economics tell us about finance, business, people and society?
Riedl: “Behavioural economics explains that people who are willing to accept high risks by going to a casino, where they will almost certainly lose money, are also likely to take out expensive insurance for low-loss events (like cover for bicycle theft). Standard theory would say that those who go to casinos should not take out this kind of insurance, and vice versa. But behavioural economics can explain default effects; that is, that people end up with different choices depending on what the default is, e.g. opting-in vs opting-out schemes in organ donation. Countries with opt-out schemes have many more listed organ donors than countries with opt-in schemes.”
Werner: “The standard economic model assumes that economic subjects, i.e. people, are fully rational, can process all relevant information and decide in a profit-maximising way. However, in many circumstances standard economic theory does not adequately describe actual human behaviour. Behavioural economics integrates insights about real human behaviour. One important example is loss aversion: human decision-makers perceive losses and gains from economic decisions very differently; losses hurt much more than same-sized gains produce pleasure, which is relevant in many economic decisions.”
Brüggen: “Behavioural economics leads to more realistic insights on people’s decision-making. And this forms a much stronger evidence base for public policymakers. For example, in the case of credit card debt, classical economics would predict that people should do whatever maximizes their money. But Thaler argued that people do mental accounting that breaks their wealth up into different accounts that are targeted for specific needs and not for maximizing their overall wealth.”
Are you a behavioural economist?
Riedl: “I would call myself a modern or new economist. But yes, I am an experimental and behavioural economist (and neuroeconomist), mainly using experiments to study human behaviour in economic decision situations. My research ranges from decisions under uncertainty and ambiguity to the role of social norms in social interaction to the effect of social preferences in financial decisions. You can read more at arnoriedl.com .”
Werner: “Yes, I am a behavioural and experimental economist. The goal of my research is to apply insights about the nature of social motivation (such as preferences for fairness) in order to design organizations and markets in an efficient way.”
Rott: “I am part of a strong group of behavioural and experimental economists at SBE and use both lab and field experiments to understand what drives human behaviour and how outcomes can be improved.”
Brüggen: “Some behavioural economists would say I am not. And if interpreted narrowly, I am probably not. But I do consider myself a behavioural economist, since I study how psychological, social, emotional and cognitive factors influence decision-making related to financial and retirement planning.”
What place does behavioural economics have in the curriculum at Maastricht University?
Rott: “Our group integrates the insights from behavioural economics in the courses we teach in the Economics and Business Economics programmes at SBE (both at the undergraduate and graduate level).”
Werner: “Insights from behavioural economics are found in courses in both the bachelor’s and master’s programmes at SBE. Students in the bachelor’s programme, for example, can choose the elective course in Economic Psychology. Master’s students can choose the programme in Human Decision Sciences that combines insights from psychology and economics.”
Brüggen: “Behavioural economics plays a part in the Research Master’s in Cognitive and Clinical Neuroscience (FHML, FPN and SBE), and the Master’s in Human Decision Science (FPN and SBE). It also appears in several courses in different master’s programmes (behavioural economics, behavioural finance, consumer psychology). Behavioural economics helps students learn about the bounded rationality of people and how important it is to account for this in the design of policies, products and services.”
Riedl: “Speaking generally, many academics try to incorporate behavioural insights into their regular courses. Students learn to look beyond the standard homo economicus and how to incorporate psychological and behavioural insights into the study of human economic decisions. If you search on unimaas.code.nl with the terms ‘behavioral’ and ‘psychology’, you’ll find offerings such as EBC2094 in EBE, EBC2080 in IB/IBE, CAP3033, EBC2103 (at bachelor’s level) and EBC4200 in RM EFR, EBC4053 in FIN, EBC4198, EBC4079, EBC4021, EBC4203, EBS4026 (at master’s level). There are also behavioural economics (inspired) courses at UCM and UCV.”
READ ALL ABOUT IT: MAASTRICHT UNIVERSITY ACADEMICS RECOMMEND KEY TITLES ON BEHAVIOURAL ECONOMICS
Arno Riedl’s picks:
Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, by George A. Akerlof and Robert J. Shiller (Princeton University Press, 2009)
Nudge: Improving Decisions about Health, Wealth and Happiness, by Richard H. Thaler and Cass R. Sunstein (Penguin, 2008)
Thinking, Fast and Slow, by Daniel Kahneman (Allen Lane, 2011)
Behavioral Game Theory: Experiments in Strategic Interaction, by Colin F. Camerer (Princeton University Press, 2003)
Introduction to Behavioural Economics, by David R. Just (Wiley, 2014)
Advances in Behavioral Economics, edited by Colin F. Camerer, George Loewenstein, & Matthew Rabin (Princeton University Press, 2003)
The Foundations of Behavioral Economic Analysis, by Sanjit Dhami (Oxford University Press, 2016)
Peter Werner’s pick:
“Psychology and economics: evidence from the field“, by Stefano DellaVigna (Journal of Economic Literature, 2009).
Christina Rott’s pick:
“Save More TomorrowTM: Using Behavioral Economics to Increase Employee Savings, by Richard H. Thaler and Shlomo Benartzi (Journal of Political Economy, 2004)
Lisa Brüggen’s pick:
Predictably Irrational: The Hidden Forces that Shape Our Decisions, by Dan Ariely (HarperCollins, 2008)