Richard Thaler’s key input into the field of economics is that ‘humans are going to human’. Classical macroeconomics were long preoccupied with trying to find a perfect model for economics, where humans were completely rational actors. Thaler took that work and said “Hold on a minute. Humans are irrational”.
It is illustrative that his work has only become popular after the 2008 crash when classical macroeconomic models crashed down around us all. So, in a sense, together with the likes of Thomas Piketty, he forms a push to move economics into a more realistic state.
Personally, I would add Steve Keen to that movement, although Keen is far more marginal and far more of an outlier. Keen’s work is to push economics firmly into the realm of dynamic systems, chaos theory, and Lorenz calculations. Lorenz being the towering giant of meteorology, who gave that field its foundations and predictive powers. With Lorenz calculations, weather could accurately be modelled, although only for a short time until the conditions change.
Thaler is employed by the University of Chicago and is a psychologist who studies how people make economic decisions in real-world conditions. His work uses psychological research to create new models for human economic behaviour. This is what is called “behavioural economics”, and this field has blossomed since the financial crash.
From a public policy perspective, Thaler showed that people are economically lazy, and what they do depend on the initial conditions for their actions. You could say that human beings have a sensitive dependence on the initial conditions in which a small change in one moment can result in large differences in a later state. Okay, that was a joke, but only a half-way one.
Take defaults. Opt-ins and opt-outs of initial defaults of public policy, like whether they are automatically enrolled in unions or pension schemes, create the dynamics for those unions or that pension scheme. Few people will opt-out if they are automatically enrolled. An example of this can come from left-field.
Up until 2010, every single Swede was automatically enrolled into the state Lutheran Church, despite Sweden being a thoroughly agnostic or atheistic country. Few people took the step to leave the Church.
So, in conclusion, giving the Nobel Prize in Economics to Richard Thaler is good news for everyone, because the field of economics can be nudged toward a more realistic and more empiric state where the participants do not chase the perfect mathematical formula to model deeply human behaviour but incorporate the messy reality that humans are going to human.