My guest today is Richard Thaler. He’s one of the true pioneers in the field of behavioral economics, which integrates psychology and economics. He’s a co-author of the book Nudge: The Final Edition, a recent update to the 2008 blockbuster bestseller, and he’s won the Nobel Prize in economics. But he’s different from the other Nobel Prize winners I know in two important dimensions: first, he has a healthy dose of common sense to go along with his brilliance. And second, he actually has a sense of humor.
THALER: If you’ve seen the movie, you’ll remember the scene and you’ll be surprised to learn that I was in it.
Welcome to People I (Mostly) Admire, with Steve Levitt. People I (Mostly) Admire is Adweek’s Best Interview Podcast of 2021.
I first got to know Richard Thaler roughly 15 years ago, when he and another professor at the Chicago Booth School of Business, Gene Fama, invited me for a round of golf. Little did I know at the time that I would become the black sheep of the threesome. The only one not to win a Nobel Prize. We’ve since become friends, and when I’m in need of a creative idea to solve a tough problem, Richard is always on the short list of people I look to for help. He’s more or less a dream guest for me: he’s smart, he’s well known, he loves to talk. And he and I disagree on many topics. So, I suspect some sparks will fly.
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LEVITT: You pioneered a field that everyone initially thought was silly, but now it’s highly respected as evidenced by your Nobel Prize. You’ve got one of the best-selling economics books of all time. You made a ton of money developing an investment fund built on your ideas in the finance realm. You’re healthy. You have a fantastic wife. Your golf game is better than ever. You’re happy. It really seems when you look from the outside like you’re a guy who won the game of life. Is that the way you see it as well?
THALER: I think I’ve been really lucky and I wouldn’t say I won the game of life, but I spun the roulette wheel and it came up on my number. I’m obviously very grateful for that.
LEVITT: You wrote an autobiography of sorts called Misbehaving and in it, you write about how, as a young man, you wondered whether behavioral economics would represent a paradigm shift in economics, referring to Thomas Kuhn’s famous work on how scientific disciplines change course. As successful as behavioral economics has been, it doesn’t feel like it’s achieved anything like a paradigm shift. Do you disagree with that?
THALER: I completely agree. Here’s the state of play as I see it — I’d be interested in your perspective on it. So, it has succeeded to the extent that every top journal has behavioral economics articles in almost every issue, and every top economics department has somebody who thinks of themselves as a behavioral economist and many others who do it on the side. On the other hand, the textbooks have barely changed at all. So, no, there’s not been a paradigm shift. I’m just thrilled that there are brilliant young people that are doing this stuff. And, maybe in another 30 years the profession will look a little different, but it’s hard to imagine a complete revolution.
LEVITT: I still remember the moment when you told me you were going to write the book Nudge. It must have been the spring of 2007. Freakonomics had come out two years earlier and had been a big success, so you and your co-author Cass Sunstein were looking for some advice. And the idea of you and Cass writing a book sounded fantastic. You’re one of the most creative and engaging economists on the planet, and Cass is a brilliant thinker and a master of persuasion. Then I asked you what the book would be about. And you said, “Libertarian paternalism.” Without even knowing what in the world you meant by “libertarian paternalism,” I knew that any book with those two words in the title would sell about 2,000 copies.
THALER: I had an idea that it wouldn’t be as horrible as it sounds, but I certainly agreed that with that title, it would have been lucky to sell a hundred copies.
LEVITT: I don’t think I was the only one who had doubts about this book because you went and pitched it to publishers, and you got a pretty lukewarm response, right?
THALER: Uniformly hated it. The title Nudge was suggested by one of the publishers who rejected the book, and they said, “We actually liked this book, but we’re in a bit of internal turmoil, so we can’t really publish it right now, but the idea of this book reminds me of the word ‘nudge,’ which is kind of a fun word and maybe you could use that.” And we immediately thought, “What a great title.” And then put it into the book in such a way that our publisher couldn’t later mess with it.
LEVITT: So, you embedded the word “nudge” so deeply and heavily throughout the text of the book that it would have been embarrassing and ridiculous not to call it the book “nudge.”
THALER: Well, and a lot of work, right? We would now call it “sludge.” So, we made it costly to change the title.
LEVITT: So, this may be too personal a question, but do you remember roughly what you got paid as an advance on the book?
THALER: Yeah. $100,000.
LEVITT: That’s actually more than I thought. From an academic press, that’s a lot, but I do know that at that time, the going rate that tons of economists were getting was three to five times that, which really tells you how the market really didn’t think this book was going to succeed. But indeed, you didn’t sell 2,000 copies or a hundred copies. You sold a couple million copies. But if I remember correctly, because you were working with this sleepy academic press that did no marketing, the book didn’t immediately become a hit. Is that true?
THALER: That’s true. Their idea of marketing was locking it in a warehouse and hope somebody ordered it. So, we convinced them eventually to sell the paperback rights to Penguin. That cut our royalty rate in half and increased our income.
LEVITT: Economics at work. So, let’s get into the ideas around the book. For people who’ve had their head under a rock for the last decade, what’s a nudge?
THALER: So, we define a nudge as something in the environment that attracts our attention and influences our behavior in a way that doesn’t require anyone to do anything and doesn’t change economic incentives. Another way to put it is that the rational economic agent, homo economicus, would not react to nudges, but humans will.
LEVITT: Rattle off examples of what nudges are, just to give people a flavor for the spectrum that a nudge could take.
THALER: Undoubtedly, the most famous nudge appeared in the urinals of the Amsterdam airport, where some genius got the idea to etch the image of a house fly dead-center in the urinal, with the idea that if you give a man a target, he will aim. We haven’t been able to check the data on this — according to them, spillage, which is a great euphemism, was decreased by 80 percent. So, why is that a nudge? Well, when you go to the toilet, you know what you’re supposed to do — at least since age three — so, you shouldn’t need the help of a target, but it works. At a more serious level, for years, companies had the peculiar problem that people were failing to enroll in retirement plans, even though the economic benefits were enormous. Many companies will match contributions 50 cents on the dollar, sometimes dollar for dollar, up to 6 percent of pay. It’s a no brainer. Everybody should join, but as many as half of the people wouldn’t join, say, within the first year of eligibility. I had suggested in 1994 that we could solve that problem just by changing the default and automatically enroll people in the plan unless they opt out. Finally, some company tried it, and lo and behold, enrollment jumped from 50 percent the year before to 90 percent. This one has been replicated all over the world, including the U.K. — has a national system and they decided to use automatic enrollment and less than 10 percent opt out. So, this really works.
LEVITT: So, nudges do not include mandates or taxes or probation. And nudges are not allowed to reduce the choice set. People always have the choice that they had before the nudge, the nudge is just a way of tilting them towards doing the right thing or making it easier for them to make a choice.
THALER: Exactly. Our ideal nudge is G.P.S. Both Cass and I have hopeless sense of direction. So, think about what G.P.S does. If you decide to come over and visit me in Lincoln Park, you plug in my address — that’s your choice. Then the program suggests a route which you can accept or reject. And if you change your mind part way and say, “Oh, we forgot to buy Thaler a bottle of wine, let’s stop over here and do that,” the computer never complains. So, we would like a world in which everything is as easy as navigating from Hyde Park to Lincoln Park in Chicago if you have Google Maps.
LEVITT: And another piece then is that your nudges are supposed to be cheap — that they’re supposed to be things that you just put on and you get hopefully magical results that are far out of bounds with cost of doing it.
THALER: Correct. Although, one thing I don’t like about the title Nudge is that it subtly suggests that we’re about tweaks. And sometimes the right solution is to re-engineer the entire system. Think about the difference between a cafeteria and a restaurant with a menu. Those are completely different choice environments. Sometimes we might want to make bigger changes, but still following this rule that we don’t force anybody to do anything. We don’t think that we can solve all the world’s problems, or maybe even any of them, with nudges. The point of the book was to say, “Let’s see how far we can go, even tying one hand behind our back.” It’s like if you and I went out and played golf and you decided you were going to just use a seven iron and a putter. That’s an interesting challenge. And we said, “Let’s see how much we can accomplish with this gentle tool, and see how far we can go.”
LEVITT: So, nudges are closely linked to behavioral economics but actuality nudges come in many different flavors and many of them have nothing to do with behavioral economics, like dividers in the lane where you can just paint the strip yellow, or you can have a raised surface that whenever you start to veer over the lane, you go de-dump, de-dump, and you know that you’ve driven over the lane. Do you agree that there’s no reason to necessarily rely on behavioral economics?
THALER: I totally agree. I’ll go further to say you also don’t need psychology. Much of it is just common sense. You mentioned those roads that start making noise if you go off to the side. There’s also the example we have in the book of — there’s a dangerous curve on Lake Shore Drive in downtown Chicago that has a speed limit reduction, but people wipe out there all the time.
LEVITT: I have wiped out there once actually.
THALER: So, they did something very clever. Now this one you might borderline say is deception, because it uses a visual illusion. They painted horizontal lines across the road that get closer and closer together as you near the apex of the curve and it creates the illusion that you’re speeding up. So, you have the reaction to put your foot on the brake and it would have been good if those lines were there before you had wiped out.
LEVITT: Well, they were there when I wiped out. I wiped out anyway. I’m not very visual. Maybe that’s part of the problem. So, there’s so many different kinds of nudges. If you were only allowed to use one kind for the rest of your life, I bet I know which one you’d pick.
THALER: Probably defaults.
LEVITT: Yeah. What do you mean, probably? Defaults are like the most amazing thing in the world. They’re free, they’re easy, and they move behavior radically in every setting. That’s a fair assessment, right?
LEVITT: Okay, good. Give me a counter example.
THALER: So, two of the chapters in the final edition illustrate when defaults work and when they don’t. There’s a paper written by three economists at Carnegie Mellon about people making choices of health insurance. A very large company decided to use a choice architecture that I think most of your colleagues in the economics department would think is great. There were four variables you could pick: deductible, co-insurance rate, maximum out-of-pocket costs, and so forth. And there are various levels for each of those, 48 combinations altogether. Each at a price. And they said, “Pick any combination you want.” It’s like sending the recipe you want the chef to use to cook your dinner. So, a majority of the people selected health insurance policies that were dominated by another one. What does dominated mean? It means worse on some dimension and not better on anything else. And in that case, there was a default, but hardly anybody took it. So, why not? It’s because what psychologists would call “demand effects.” If I point you toward a salad bar, then you’re going to go make a salad. You’re not going to say, “Oh, give me a Caesar.” So, they were being asked to create their own health insurance policies. So, they did. Turns out they’re lousy cooks. So, that’s one example. A second one is in Sweden, they have a partially privatized social security system, and they had a default investment strategy and they also allowed essentially free entry of mutual funds into this, which got them 456 options, one of which was the default, but then they advertised saying, “Don’t take the default, choose your own.” So, now there’s a battle of the nudges. The default is a nudge. The advertising is a nudge. Which won? Turns out the advertising. So, two-thirds of the Swedes chose their own, and they did a pretty lousy job of it. And there’s a third example on which I think there’s enormous confusion, which is organ donation.
THALER: In the U.S., we have an opt- in system. So, in Illinois, where we live, when you get your driver’s license renewed, they ask you whether you want to be an organ donor and if you say yes, they put that on your license and enter you into a registry. But there are countries that use something they call “presumed consent,” where you have to opt out. And there’s a famous paper by two friends of mine, Eric Johnson and Dan Goldstein, showing that in countries that use presumed consent, almost no one opts out, 2 percent of the people opt out, whereas in places like the U.S. maybe only half opt in. So people say, “Oh, look, there’s the solution to the problem.” And in the first version of the book, we made it clear, “No, no, we don’t like that.” And there’s a subtle reason why that system doesn’t work, and it has to do with what we economists would call “path dependence.” So, if you come over to visit me in my office, it makes no difference what route you took to get there. If you took the elevator or took the stairs, you’re in the same place. That’s not the case for organ donors. The data show that you actually get about 25 percent more organs transplanted with an opt-in system than presumed consent. People who have elected to be organ donors are treated very differently from people who have been presumed to be willing. And in countries that do that, they don’t presume anything, and they ask family members, and the family members have no clue.
LEVITT: Because they’ve never talked about it because there’s no registry. No one ever comes home from the Department of Motor Vehicles and says, “Oh, I became an organ donor today.”
THALER: This is a matter of some frustration to me. In the U.K., I helped convince David Cameron’s government not to adopt presumed consent and Boris Johnson’s government recently switched.
LEVITT: It’s interesting cause what it really points out, which I think is consistent with and at the heart of nudges, is that you need to understand the context in which you’re operating to design the system that given that context, gets the job done. The dynamics in the discussion between a doctor and a patient and the patient and that patient’s family are critical to getting the right answer, which is a little bit of where the psychology comes into this.
THALER: The context point is crucial. There are no simple answers. You really have to understand the system you’re working in, in order to create the right choice architecture.
LEVITT: In spite of my general and continuing skepticism about behavioral economics, Nudge completely changed the way I think about the world. Economists have historically had two basic approaches to changing people’s behavior. One is incentives. By raising or lowering the cost and benefits of an action, you can get people to do more or less of it. If you put a $3 per gallon tax on gasoline, people will drive less. So, the second tool that economists had was education. If we think people are making bad choices about money, for example, we offer free seminars on financial planning. But nudges really represent a third path by which we influence people’s behavior. When faced with a new problem, it used to be that I’d say, “Should I use incentives. or should I try to teach them to do it better?” But now after your book, I always start with thinking about nudges. And if I run into a wall, then I say, “Okay, incentives or education, what should I do next?” That to me is really profound because it’s such a simple and really obvious insight. Do you share the same feeling about nudges?
THALER: Obviously, I’m less skeptical about behavioral economics than you are, but I do think that choice architecture was not appreciated.
LEVITT: Yeah, for sure.
THALER: If you think about what companies have done the best since we wrote this book — and I’m not saying that we had anything to do with it — they are all fantastic at choice architecture. Consider Apple, Google, Amazon, Netflix. It’s easy. You open an iPhone and it works. You want to buy a copy of Nudge: The Final Edition or your 15th copy of Freakonomics on Amazon? You do it with a couple clicks. It was an important topic that people just hadn’t thought enough about.
LEVITT: So, it’s not like you guys invented nudges, obviously, but somehow you did manage to bring them to the fore of policymakers. There’s now 40 countries that have something with a name like the nudge unit, which is really remarkable to me.
THALER: It’s 400, Steve.
LEVITT: There aren’t even 400 countries on the planet.
THALER: There are 400 nudge units around the world. There’s one in Chicago. They’re not just at the country level.
LEVITT: Okay. Now you’re going to hate my language. If I try to narrow down what nudges do, it’s not quite right, but in my experience it turns out to be easier to trick people into doing what you want them to do rather than incentivizing them or teaching them. I know you hate that. So, tell me why you think that’s a terrible characterization of nudging.
THALER: I think it is terrible because ‘trick’ suggests that they wouldn’t do it if they understood. Some guy on the street playing three card monte who tricks you into thinking the pea is under this walnut and it’s actually under the other one, that’s tricking you. Making it easy for you to join the pension plan, which will make you comfortable when you retire, is not tricking you. And another reason why trick is the wrong word is it suggests that it needs to be secret. We insist that nudging be transparent. If joining the retirement plan is automatic, you’re told that because you’re also told, “Here’s what you have to do if you want to opt out.” I don’t think there’s any tricking involved.
LEVITT: Yeah. So, sometimes it’s not tricking, but —.
THALER: Give me an example where it is.
LEVITT: The cafeteria where, if you want people to eat in a more healthy way, you put the healthy food at the beginning and the really tasty ones at the end.
THALER: No, no, but Steve, just listen to yourself. Making the fruit more visible is the opposite of tricking. It’s making it salient. Now, if we hid the Snickers bars and you had to go ask for them, it’s not clear that would fit as nudging, but that’s almost never what we do.
LEVITT: I’m not saying that nudges have to involve deception any way, shape or form, but because nudges are operating on the margin of inattention and on the margin of biases that people have that tilt them in one way or the other, it often will be subconscious. Now, infomercials, for example, they’re masters of nudging. They exploit people’s biases to get them to do what they want them to do. Infomercials use exactly the same set of tools that you use, and in the end, they make people buy stuff that they might not have wanted to buy otherwise.
THALER: I think infomercials are full of deception, and it’s not so much nudging as it is flim-flammery and high-pressure sales. We’re in favor of cooling-off periods for products that are sold that way. A cooling off period is a rule that says you’re allowed to change your mind within, say, 72 hours.
LEVITT: I love the example you use in Nudge about Homer Simpson.
THALER: He goes to buy a gun because he’s so mad he wants to kill somebody. And the guy says you have to wait 72 hours and he says, “72 hours? But I’m angry now!”
You’re listening to People I Admire with Steve Levitt and his conversation with Nobel-laureate Richard Thaler. They’ll return after this short break.
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LEVEY: Hi, Steve.
LEVITT: Hello, Morgan.
LEVEY: As 2021 comes to a close, I want to talk about the people that we’d love to have on the show as guests, and that I’ve tried to secure as guests, but I’ve been really unsuccessful at booking.
LEVITT: So, you know who I’ll say first, because it’s the person whose name I bring up every single time we talk about guests. Who is it?
LEVEY: Taylor Swift.
LEVITT: Yes, I would love to interview Taylor Swift because she is obviously talented, but what intrigues me so much about her is how she has over and over reinvented herself and how she just thumbs her nose at the music industry. My hunch is that she is incredibly smart, and I would just love the chance to hear what she has to say about the world.
LEVEY: And one of the reasons we haven’t been able to book her is because she is so busy right now rerecording her entire music library. Her former record label sold her archive and she’s retaking control over her albums.
LEVITT: A perfect example of how she thumbs their nose at the industry.
LEVEY: Another person we’ve tried to get and failed to book is Jon Stewart.
LEVITT: I have so much admiration for Jon Stewart. I was on The Daily Show with him twice. And those two times I met him, I could not believe how intelligent he was, how dynamic, how empathetic. And I would love the opportunity to turn the tables and get to interview him.
LEVEY: In that regard, I know you’d also really like to interview Trevor Noah.
LEVITT: Oh God. I love Trevor Noah. What an amazing autobiography, what a great story. What a talent. I just think he’s incredible.
LEVEY: We’re talking about a lot of people who have talk shows and interview other people. Is that what’s interesting to you is that they’re usually on the other side of the microphone?
LEVITT: No. I’ve been interviewed by a lot of people and I have zero interest in turning the tables. Jon Stewart didn’t interview me. Jon Stewart read Freakonomics and SuperFreakonomics and internalized them and had a conversation with me off air that made me think he was one of the smartest people I had ever met. And then he turned around and he went on air, and he was a comedian. My hope would be that I could get him on the show and let the incredibly brilliant side of him shine through.
LEVEY: There’s another person that you really want a book that sort of surprises me because he’s an American pastor and leads a mega church. Joel Osteen.
LEVITT: Oh God. I would so love to have Joel Osteen on the show. Now, I know he’s a polarizing figure. But I have been an enormous fan of his — even though I’m not Christian, I’m not religious at all — I still listen to his sermons all the time.
LEVEY: You do?
LEVITT: I do. My Sirius radio I have pre tuned to Joel Osteen’s channel because I enjoy it so much. I’ve been live to his sermon in Houston, believe it or not. He’s someone who you only hear on his own terms on his own show preaching, and I would love the chance to see what makes him tick. So, he’s got a lot of fans, but he doesn’t have a lot of fans like me. So, I think it could be really a fantastic podcast episode.
LEVEY: Well, I have been unsuccessful in booking Taylor Swift, John Stewart, Trevor Noah, and Joel Osteen but maybe our listeners have an in? If someone has an in with one of these people and could get them on our show, what would you do for that listener, Steve?
LEVITT: I don’t know, Morgan, are we allowed to offer cash bounties?
LEVEY: I don’t think we should offer cash. But we could offer some PIMA swag, like a mug or Freakonomics socks.
LEVITT: Oh God, that’s pathetic. We must be able to do better than that. I would offer dinner. I would say, any listener who can get me an interview with one of those four, I would be delighted to treat them to a fancy dinner or an unfancied dinner. I like unfancy food. That would be a pleasure.
LEVEY: I haven’t even met you in person, but one of our listeners gets to meet you in person?
LEVITT: If you can get one of those four in the show, then you get to meet me in person too, Morgan.
LEVEY: Okay, Steve, it’s a deal. We are also open to other guest suggestions. If you’d like to hear somebody on People I (Mostly) Admire, pitch it to us. Our email address is email@example.com. That’s P-I-M-A@freakonomics.com. It’s an acronym for our show. Steve and I read every email that’s sent, and we look forward to reading yours.
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In the second half of our conversation, I’d like to move away from the subject of nudges to try to hit two broad topics. The first is whether even economists actually live by the rules of textbook economics. If we fall prey to behavioral biases, who doesn’t?
LEVITT: So, we’re both professors at the University of Chicago, ground zero for rational economic thinking. With that in mind, do you remember the chaos that ensued when faculty offices had to be assigned when the business school moved into its new building?
THALER: I wrote a chapter about that in my other book, Misbehaving. We built a spiffy new building, and everyone was going to get a better office but there was the question of who would get which one. The deans decided to conduct the equivalent of an N.F.L. draft. Somebody would get to pick first, and they would pick their office, and then whoever was second would get to pick, and so forth. The picking order was determined in some mysterious way. You’d get an email and say, “You’re going to pick at 11:30 on Thursday.” It took the faculty about an hour of frantic emailing to piece together what the actual order was.
LEVITT: So, the entire activity of the organization became focused on the allocation of offices. So, you’re saying everybody wasn’t happy with the slot that they were put into in the draft.
THALER: They did say that there were a certain number of categories. Maybe there was a superstar category, and maybe it had 10 people or 20 people, but they said it would be random within that. People who were unlucky within their category were furious, even though they all understand what random means. But the most amusing thing to me was that they adopted a rule that said you may not trade offices or picks.
LEVITT: So, they basically suspended any market-like activity that would allow people’s intensity of preferences to be demonstrated, even though this is the University of Chicago and these are mostly economists doing it.
THALER: Yup. It gave me great amusement.
LEVITT: I love that example because it shows how even people who espouse markets and rationality — when things get too close to home, they tend to revert to other kinds of behaviors. I have a constant battle with the administration capping my class size. And one year I actually succeeded and I got them to release the cap and maybe 200 students took my class that year and everything went great. But then the next year, when I looked at the course catalog, I realized that my class was, once again, limited to 50 students. I went to the administrator and said, “Why did you limit my class to 50? Everything seemed to go great last year with 200.” And he said, “If so many students take your class, then there’s hardly any students taking the other economics professors’ classes.” And they were so mad that they said that we had to cap your class at 50 again. These are Chicago economists who believe deeply and religiously in the markets, but rather than offer a high enough quality class that students actually want to take it, they want to resort to interventions by a central authority, the department coordinator, to override market forces. And then actually, that year, as I tried to appease the students who showed up hoping to take my class, I expressed my own discontent with the system and how inefficient it was. I said, “Well, they wouldn’t allow more students to enter, at least there should be a way for students who really want to be in the class to buy a spot from a student who was lucky enough to get in, but didn’t actually care very much.” And a few days later, I got a phone call from the Dean of Students saying she had some terrible news. They had discovered that a student in my class had sold her spot to another student for a thousand dollars. And she was going to be suspended immediately and they were going to consider whether she should be kicked out of the school. They just wanted me to know, so I wouldn’t be so shocked if this became a headline in the school newspaper. So, given the apparent horror surrounding the situation, I was somewhat sheepish when I admitted that it had been my idea and I told them to sell their spots in the class. So, of course, the student got let off the hook. Later, I hired her to be my research assistant, and here’s the twist that’s so interesting. This incident became a staple of the college tours given to prospective students visiting campus. The student tour guides would tell the story of the student who, thinking like an economist, made some cash and impressed me so much that I hired her to be my research assistant and the story came to symbolize really the power of economic thinking and the innovativeness of our students, always leaving out the fact that she was on her way to expulsion for exactly those same set of characteristics that we supposedly cherish until I stepped in and got her off the hook.
LEVITT: So, it’s undeniable that even the people who shouldn’t suffer from behavioral biases, the Chicago economists, do. But at the same time, I think the general public has developed an unrealistic view of the power of behavioral economics. But, when I had Danny Kahneman on my podcast, I said, “Danny, it seems to me empirically that the expectation about what behavioral economics can do for behavior change has outpaced the reality.” And Danny replied, “Absolutely. You’re absolutely correct if you’re implying that we’ve been too persuasive.” Books like Thinking Fast and Slow, which is Danny’s popular book, have managed to convince lay people that behavioral economics is the most powerful tool one has ever encountered.” Now, I suspect you completely disagree with this.
THALER: It is true that Danny is a pessimist and I’m an optimist. I will say, since we’re talking about Nudge, I think most policy changes that qualify as nudges have small-effect sizes. And that’s why when we rewrote the book and we have a chapter on climate change, we say, “We’re not going to solve climate change with nudging. We have to have a carbon tax or cap and trade. Get the prices right.” I’m still an economist. There are things that categorize as nudges — for example, automatically enrolling people into green energy or telling people how much energy they use compared to their neighbors. These get 2 or 3 percent effect sizes with huge sample sizes in the millions, but they’re small. We quote President Obama in the book, who liked to say, “Better is good.” If we can reduce utility consumption by 2 percent by adding something to the bill they get every month, which is free.
LEVITT: Yeah. You’re saying not adding a cost, like economists want to add a cost to the bill to get usage down by 2 percent. You want to add a picture that shows them looking gluttonous relative to their neighbors. Anything to get for free, why not take it? That’s your view of the world.
THALER: Yeah. And I think the big question — maybe this is a behavioral economics question, but it’s not one for which I have an answer — is why are we as economists so unpersuasive about why we need to price carbon emissions?
LEVITT: That’s a great question. Because, literally every economist I’ve ever known would tell you, “Of course we should have a tax on carbon. This could not be more obvious.” And maybe the politicians just don’t do it because it’s unpopular.
THALER: It is very frustrating because right now in the U.S. the Republicans are opposed to it because it’s a tax and the progressives are against it because they think whatever the tax was, it wouldn’t be high enough and some of the tax would be paid by poor people and they shouldn’t have to pay it. These are silly arguments. Obviously, you can have a carbon tax and distribute the money in a way that is progressive, but we’re united in our opposition to the only chance, really, that the planet has of survival. And I think this is the greatest failing of the economics profession ever.
LEVITT: We have a simple approach that could make a material impact. And yet we’re completely ineffective in communicating that and convincing people other than economists that that’s true.
THALER: And Swedes. So, Sweden has the highest carbon tax, and lo and behold, emissions have gone way down and the economy is thriving. So, for once economists are right. We don’t know how to control unemployment or recessions or inflation, maybe. But we do know if we raised the price of carbon, people will emit less. Even crazy behavioral economists know that, and yet we can’t convince anybody to do it.
LEVITT: Do you have advice for people who exhibit the kind of biases you’ve spent your life uncovering? Should they fight these biases? Should they try to be more like an economist?
THALER: It depends. We all have self-control problems. Danny Kahneman says my best quality is that I’m lazy.
LEVITT: Danny Kahneman says that your, Richard Thaler’s, best quality is you’re lazy?
THALER: Yeah. I complain when he says that. I admit to being lazy, but I say, “Is that really my best quality?” We think of each other as best friends. So, this is your best friend saying your best quality is lazy. He justifies it as saying, the fact that I’m lazy means that I only work on things that are important. I’m not sure that’s true. I only work on things that I think are interesting and fun. But we all have self-control problems, and it’s useful to recognize that we do and then to take appropriate steps. So, you can call them ‘tricks.’ Katy Milkman, a professor at Wharton who’s a behavioral economist, has learned that people are better at implementing self-control initiatives if they occur at the beginning of the year or on a birthday. She calls them a fresh start. I have a meta new year’s resolution, which is I only make resolutions I intend to keep, which means I almost never make them. In the class I teach on decision-making, I give the students a bunch of rules that I modestly called “Thaler’s Rules for Good Decision-Making.” And one of them encapsulates the whole course. I have to explain the concept of a sunk cost. If you paid for some very rich dessert and are full after two bites, but continue to eat it because you paid for it, you’re committing what economists called the sunk cost fallacy, because you paid for it and you’re not getting any of that money back by eating more of it.
LEVITT: Or there’s some concert you don’t want to go to, the weather’s terrible, or you feel sick. If you paid $200 for the tickets, you’re going to go to that concert. If you got the tickets for free, you don’t go, which to an economist makes no sense at all.
THALER: Right. So, my rule to my students is ignore sunk costs, but assume everyone else doesn’t.
LEVITT: Spoken like a true economist.
THALER: That is a high compliment.
LEVITT: Has winning a Nobel Prize made life a lot more fun for you?
THALER: Around the edges. I got invited to play at Augusta National. That was pretty great.
LEVITT: You got to be a movie star for a short period of time. Tell me about The Big Short.
THALER: The movie was before the Nobel.
LEVITT: Oh, it was? I didn’t realize that.
THALER: So, if you’ve seen the movie, you’ll remember the scene and you’ll be surprised to learn that I was in it. It’s a scene at a Blackjack table and I’m there with the pop star Selena Gomez. And our job was to explain the concept of a collateralized-debt obligation using blackjack as the analogy. Selena Gomez, didn’t know what any of those three words, collateralized debt obligation means, but more fundamentally, did not know the rules of Blackjack. So, the script was that on the first hand, she would be dealt 21, a face card and an ace, which automatically wins. And she gets dealt 21 and doesn’t react. I said, “Selena, you got to understand 21, that’s good. You got to be happy. You got to celebrate.”
LEVITT: Wait. So, you had to play director? What’s the director doing?
THALER: Directing and writing. Because the economics was all wrong. They called me a week before they were filming. The director, Adam McKay — I flew down to New Orleans where it was filmed. We rewrote that scene over take-out Thai food, and then it turns out I couldn’t memorize the lines. So, the whole thing is ad-libbed on my end. Selena Gomez can memorize lines. He won the Oscar for best screenplay and I think I should get at least —.
LEVITT: Get a fingernail off of that statue.
THALER: Yeah. Or maybe I’ll have it for a day or something like that.
LEVITT: How long did it take to film what turned into roughly two minutes on screen?
THALER: One whole day.
LEVITT: Wow. And how much did you get paid for that?
THALER: Less than Selena Gomez.
If you’re interested in more from Richard Thaler, pick up Nudge: The Final Edition. It’s a new and improved version on that classic book. I suspect you’d also enjoy Richard’s semi-autobiographical book entitled Misbehaving: The Making of Behavioral Economics. And last, but not least, be sure to check out the Freakonomics Radio episode number 474, “All You Need is a Nudge.” To commemorate the end of the year, we’re doing something special next week. We’re busy compiling all the advice that my various guests have handed out and we’re trying to make some sense of it. Also, we’re going to switch things up and have a few of our listeners take a turn as guests. That’s next week.
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People I (Mostly) Admire is part of the Freakonomics Radio Network, which also includes Freakonomics Radio, No Stupid Questions, and Freakonomics M.D. This show is produced by Stitcher and Renbud Radio. Morgan Levey is our producer and Jasmin Klinger is our engineer. We had help on this episode from Alina Kulman. Our staff also includes Alison Craiglow, Greg Rippin, Rebecca Lee Douglas, Zack Lapinski, Mary Diduch, Ryan Kelley, Eleanor Osborne, Emma Tyrrell, Lyric Bowditch, Jacob Clemente, and Stephen Dubner. Theme music composed by Luis Guerra. To listen ad-free, subscribe to Stitcher Premium. We can be reached at firstname.lastname@example.org, that’s P-I-M-A@freakonomics.com. Thanks for listening.
LEVITT: You’ve played Augusta, are there any more golf courses that you still would love to play?
THALER: I’ve heard Pine Valley is fantastic.
LEVITT: Okay, we’ll see if, this podcast has the same pull as Golf Digest and whether in less than 18 months, we can get you on Pine Valley.
- Richard Thaler, professor of economics at the University of Chicago.
- Nudge: The Final Edition, by Richard Thaler and Cass Sunstein (2021).
- “Carbon Taxes Worldwide as of April 2021, by Select Country,” by the World Bank (2021).
- Misbehaving: The Making of Behavioral Economics, by Richard Thaler (2015).
- “Choosing a Health Insurance Plan: Complexity and Consequences,” by Saurabh Bhargava and George Loewenstein (JAMA, 2015).
- “The Fresh Start Effect: Temporal Landmarks: Motivate Aspirational Behavior,” by Hengchen Dai, Katherine L. Milkman, and Jason Riis (Management Science, 2014).
- “Aiming To Reduce Cleaning Costs,” by Blake Evans-Pritchard (Works That Work, 2013).
- “Do Defaults Save Lives?” by Eric J. Johnson and Daniel G. Goldstein (SSRN, 2009).
- Nudge: Improving Decisions about Health, Wealth, and Happiness, by Richard Thaler and Cass Sunstein (2008).
- “Design Choices in Privatized Social-Security Systems: Learning from the Swedish Experience,” by Henrik Cronqvist and Richard H. Thaler (The American Economic Review, 2004).
- “Psychology and Savings Policies,” by Richard H. Thaler (The American Economic Review, 1994).
- “All You Need Is Nudge,” by Freakonomics Radio (2021).
- “Maya Shankar Is Changing People’s Behavior — and Her Own,” by People I (Mostly) Admire (2021).
- “Daniel Kahneman on Why Our Judgment is Flawed — and What to Do About It,” by People I (Mostly) Admire (2021).
- The Big Short, Selena Gomez and Richard Thaler scene (2015).