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4 Ways Nobel Prize Winner Richard Thaler's Work Has Improved Your Life

By John Wasik | FORBES Contributor |

When I interviewed Richard Thaler a few years ago for a Forbes magazine piece, I was confident enough to tell him he "was going to get a call from Stockholm."

ThalerWell, it took a few years, but Thaler, a University of Chicago professor, finally got the call. He was awarded the Nobel Prize in Economics today.

Over more than three decades, Thaler, along with a group of "behavioral economists," have merged psychology with decision making theory, economics and sociology to create an important, maturing field that is changing the way we see the world.

In short, Thaler and his cadre have done a scientific take on what Keynes called "animal spirits" and given us some essential insights on how we think when it comes to money and everyday decisions.

Since I saw Thaler speak scarcely a month ago at the Morningstar ETF conference, his words and observations are fresh in my mind. Here's why he's one of the most important economic researchers of our time:

-- Nudges are More Important Than Nagging. In his bestseller Nudge, Thaler and co-author Cass Sunstein explored how we can achieve better outcomes in financial behavior.

We do much better if we're "nudged" to do something differently than when we are nagged. For example, we all know that we need to save more for retirement.

But the way most 401(k)s are set up, we have to voluntarily choose to save, pick an amount to sock away and then choose specific mutual funds. It's too much for most people, so we under save. Employers don't even have to offer retirement plans; half don't in the U.S.

Thaler and Schlomo Benartzi of UCLA, devised a program called "Save More Tomorrow" that nudges employees into saving more by automatically defaulting them into 401(k)s. In other words, you have to choose not to be in them. Most stay put and save money.

The result? People in the automatic plans save more than three times more than those outside of them. That's going to improve the quality of life for millions of future retirees.

-- Make it Simple. Thaler discovered a long time ago that the way in which we're forced to make financial decisions is way too complicated. Why not boil down decisions?

Thaler's work has focused on improving "choice architecture." The way in which we are offered choices makes a difference.

Suppose, when choosing a credit credit card, you could immediately see all charges and fees upfront? Wouldn't that help you make a better choice instead of struggling with loads of fine print?

-- Economics is About People, not Blind Theories.There are lot of grand theories in economics and what moves markets and money. But when you distill what's happening, it's about emotions and decisions that are not in our best interest.

People routinely jump into the stock market just before it crashes and stay out when it's the best time to buy.

Of course, classical economics maintains that we all act as "rational actors" in our own best financial interest. Then why do we consistently time the stock market, get the most expensive credit and think we can pick the best stocks -- and then lose money?

Thaler and his school focuses on how our brains actually work. We routinely make bad decisions because our emotions overrule rational thinking.

In this regard, Thaler and his colleagues have been consistently turning classical economics upside down. While we'd all like to think like Star Trek's logical Mr. Spock, we mostly act impulsively like the Romulans.

-- We're Already Financially Literate, We Need to Be Financially Enlightened. While most of know how to save and invest more money, we're not presented with the best ways to do it.

The Thaler/Behavioral Economics revolution must continue in a broad-based way. Why not give taxpayers receiving a federal refund a box to check to automatically deposit funds in an emergency savings account, which most people lack?

Instead of burdening retirement savers with picking dozens of mutual funds, enroll them in a pre-set portfolio that's customized to their risk tolerance, age and career? (Target-date funds sort of do this now).

And why not develop applications that instantly find the lowest-cost finance rates on mortgages, credit cards and other loans based on your credit record and income?

And for crying out loud, why can't Americans have a universal savings plan that everyone is defaulted into at birth? Why does savings have to be so hard with a bushel basket of choices from pensions to multiple forms of IRAs?

Saving could be much more efficient and simpler. More choices are not better choices.

This is the challenge of the emerging science of behavioral economics as it moves forward to help millions save for a dignified retirement and other financial goals.

Still, I'm thrilled to say that I've witnessed Prof. Thaler and others push this giant rock uphill. There's much more work to be done, of course, but we're in a much more financially secure world because of his brave and brilliant work.

Richard Thaler, Pioneer of behavioral economics, is best known for ‘nudge’ theory, which has influenced politicians and policymakers: 

 

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