October 18, 2017

How Did We Get Here From There?

We got nudged, that’s how.

Economic news is a media mainstay, but I’ve always felt that real people don’t live in “The Economy.” Instead, I think we live in a world forged from our outlook on life, which is derived from personal biases and cultural norms, so that economics is only news when our internal outlook (“I can afford that”) clashes with external reality (“No I can’t”).

Turns out somebody just won a Nobel Prize for thinking along those lines (well, sort of), except he took it much further and figured out how policy-makers who know better than we do can come to our rescue by nudging us ahead of time in the direction we really ought to go.

Richard H. Thaler is an economist at the University of Chicago, and Cass R. Sunstein is a Harvard Law School Professor. Together, they wrote Nudge: Improving Decisions About Health, Wealth, and Happiness (2009). Their concept of “nudging” super-sized behavioral economics and spawned a lucrative new consulting field. (Google “nudge” and you’ll see what I mean.) Prof. Thaler was awarded the Nobel Prize not only for Nudge, but for a body of work the The Economist summarized as follows in an article earlier this week:

Not long ago, the starting assumption of any economic theory was that humans are rational actors who maximise their utility. Economists summarily dismissed anyone insisting otherwise. But over the past few decades, behavioural economists like Richard Thaler have progressively chipped away at this notion. They combine economics with insights from psychology to show how heavily economic decisions are influenced by cognitive biases. On September 9th Mr. Thaler’s work was recognised at the highest level when the Nobel Committee awarded him this year’s prize in economics. Mr. Thaler thus becomes one of very few behavioural economists to win the prize.

That started to change when Mr. Thaler and Cass Sunstein, a legal scholar at Harvard University, co-authored a book, “Nudge”, in 2008. The book attacked the assumption of rational decision-making in economic models and showed how context could be changed to “nudge” people to make better choices. In 2010 Mr. Thaler advised the British government on the creation of the Behavioural Insights Team, a unit that sought to put their ideas into practice. The wildly successful government unit has since been spun out into a quasi-private company and now advises governments around the world.

“The Nobel In Economics Rewards A Pioneer Of “Nudges” — Richard Thaler becomes one of very few behavioural economists to receive the discipline’s highest honour,” The Economist, October 9, 2017.

Vox also summarized Thaler’s work earlier this week:

Richard Thaler, one of the founders of modern behavioral economics and the winner of the 2017 Nobel Memorial Prize in Economic Sciences, is obsessed with how people make decisions — not just investors or policymakers but everyday consumers and taxpayers. He’s tried to explain why people won’t sell wine they own for more than they paid for it, why people take out big loans even when they have plenty of savings, and how to encourage people to sock away more of their paychecks toward retirement.

“This Headline Is A Nudge To Get You To Read About Nobel Economist Richard Thaler — Okay, it’s not a very good nudge, but his work is really important!” Vox, October 9, 2017.

I confess, I read Nudge and could never quite silence my own biased subtext of resentment over the idea that politicians, think-tankers, captains of industry, and other members of The Illuminati know what’s best for my health, wealth, and happiness, and are deliberately nudging me to carry out their own agendas. I’ve made liberal use of my human right to make dumb mistakes, thank you very much, and prefer to keep it that way. On the other hand, I respect the scholarship that went into theorizing something we all probably realize but try not to admit: that we decide subliminally before we act, and then rationalize what we’ve done after the fact.

Turns out that, like it or not, “The Economy” actually does run on ideas that come down from the top. Next time, we’ll look at some of the most famous economic nudgers of all time.

By the way, there’s an Illuminati website. Watching the greeting video, I think this has got to be a parody in the same league as This is Spinal Tap. If it’s not, then it’s it just plain creepy.

 

 

 

 

 

Kevin Rhodes is on a mission to bring professional excellence and personal wellbeing to the people who learn, teach, and practice the law. His past blog posts for the CBA have been collected in two volumes — click the book covers for more information.

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