Humans are Not Rational and the Work of Richard Thaler

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Last month, one of the founders of behavioral economics, Richard Thaler, won the 2017 Nobel Memorial Prize in Economic Sciences.  You may have heard of Thaler – he’s most well-known for his book Nudge and is a writer for the New York Times.  But he’s contributed immensely to modern economics and his work is often summarized with “Humans are not rational.”

Economics often relies on an underlying assumption that all parties or stakeholders are behaving rationally.  Thaler’s work turned this theory on its head, and more than that – he worked to identify ways to predict that irrationality and improve the future of economics. His landmark paper in 1985 identified ways that people account for money in different – and illogical – ways.  And while this seems somewhat minor, it has big implications for public policy. For example, in Morocco, researchers used this research to look into how cash transfers can influence education.  They investigated the use of a “labelled cash transfer” – a small amount of money given to parents in poor, rural communities, and allocated to education support. Parents were told the money should be spent on their child’s education, but it was given to them regardless of whether their child was enrolled. Researchers found that this little nudge was enough to lead to large gains in school participation, while cash given to parents only if their child attended led to no gains. (read more here: https://www.povertyactionlab.org/evaluation/cash-transfers-education-morocco).

Thaler’s work has influenced a lot of different industries – from health care to finance, from for-profit to non-profit, even from the boardroom to the classroom.  But what I like most about it is that it is a rare brand of research that can be implemented in multiple settings without having to be an economist yourself!  For us, it got me thinking – what messaging do we give our students, how do we present the supports we provide to the community, how can we use nudging to improve our teacher practice?  Some things to think about as we head into the weekend…

Asked how he will spend the prize money, he quipped, "I will try to spend it as irrationally as possible!"