Nobel Laureate Richard H. Thaler on the End of Behavioral Finance

From the CFA Institute's Enterprising Investor blog, Oct. 9:

Richard H. Thaler, the US economist who elevated the word “nudge” from transitive verb to political catchphrase, can now add “Nobel laureate” to his impressive biography.

On Monday, the Royal Swedish Academy of Sciences in Stockholm announced that Thaler, who teaches at the Booth School of Business at the University of Chicago, had won the 2017 prize in economics “for his contributions to behavioral economics.”

In a statement, the Royal Swedish Academy said that Thaler “has incorporated psychologically realistic assumptions into analyses of economic decision-making. By exploring the consequences of limited rationality, social preferences, and lack of self-control, he has shown how these human traits systematically affect individual decisions as well as market outcomes.”

Thaler is perhaps best-known for his popular book about choices: Nudge: Improving Decisions about Health, Wealth, and Happiness — how we make them and what we can do to improve how we make them. His “nudge” theory is also credited with inspiring former UK prime minister David Cameron’s Behavioural Insights Team (BIT) — or “Nudge Unit.” Thaler reportedly “visited Britain in 2008 to promote his theory, met Cameron, and made such an impression that for a time he acted as unpaid adviser to the Tory leader.”

Former US president Barack Obama also officially adopted the “nudge” approach when he created the Social and Behavioral Science Team (SBST), which sought to integrate behavioral science research into policy making.

Shortly after the announcement from Sweden, fellow economist Tyler Cowen wrote:

“This is a prize that is easy to understand. It is a prize for behavioral economics, for the ongoing importance of psychology in economic decision-making, and for ‘Nudge,’ his famous and also bestselling book co-authored with Cass Sunstein.”

Cowen also noted that “perhaps unknown to many, Thaler’s most heavily cited piece is on whether the stock market overreacts for psychological reasons.”

Perhaps also unknown to many is that Thaler spoke at the 70th CFA Institute Annual Conference in Philadelphia this past May.

My colleague, Shreenivas Kunte, CFA, wrote a recap of the session, entitled “Richard Thaler: To Intervene or Not to Intervene.” Another colleague, Ron Rimkus, CFA, conducted a 13-minute interview with Thaler.

Thaler has also contributed to the CFA Institute Financial Analysts Journal^®, among other CFA Institute publications over the years.

In his prescient conclusion to the 1999 piece, “The End of Behavioral Finance,” he wrote:...

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