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 book co-authored with Cass Sunstein.
Perhaps unknown to many, Thaler’s most heavily cited piece is on whether the stock market overreacts. He says yes this is possible, and this article also uncovered some of the key evidence in favor of the now-vanquished “January effect” in stock returns.
Another classic early Thaler piece is on a phenomenon known as “mental accounting,” for instance you might treat a dollar in your pocket as different from a dollar in your bank account. Or earned money may be treated different from money you just chanced upon, or won that morning in the stock market. This has significant implications for predicting consumer decisions concerning saving and spending; in particular, economists cannot simply measure income but must consider where the money came from and how it is perceived by consumers, namely how they are performing their mental accounting of the funds. Have you ever gone on a vacation with a notion that you would spend so much money, and then treated all expenditures within that range as essentially already decided? The initial piece on this topic was published in a marketing journal and it has funny terminology, a sign of how far from the mainstream this work once was. It is nonetheless a brilliant piece. Here is more Thaler on mental accounting.
Thaler, with Kahneman and Knetsch, was a major force behind discovering and measuring the so-called “endowment effect.” Once you have something, you value it much more! Maybe three or four times as much, possibly more than that. It makes policy evaluation difficult, because as economists we are not sure how much to privilege the status quo. Should we measure “willingness to pay” — what people are willing to pay for what they don’t already have? Or “willingness to be paid” — namely how eager people are to give up what they already possess. The latter magnitude will lead to much higher valuations. This by the way helps explain status quo bias in politics and other spheres of life.
This phenomenon also makes the Coase theorem tricky because the final allocation of resources may depend quite significantly on how the initial property rights are assigned, even when the initial wealth effect from such an allocation may appear to be quite small. See this piece with Knetsch.
With Jolls and Sunstein, here is Thaler on a behavioral approach to law and economics, a long survey but also constructive piece that has shaped law and economics for decades. He has done plenty and had a truly far-ranging impact, not just in one or two narrow fields.
I first encountered Thaler’s work in graduate school, in the mid-1980s, in particular some of his pieces in the Journal of Economic Behavior and Organization; here is his early 1980 manifesto on how to think about consumer choice. I thought “this is great stuff,” and I gobbled it up, as it was pretty consistent with some of what I was imbibing from Thomas Schelling, in particular his 1981 piece with Shefrin on the economics of self-control, a foundation for many later discussions of paternalism. I also thought “a shame this work isn’t going to become mainstream,” because at the time it wasn’t. It was seen as odd, under-demonstrated, and often it wasn’t in top journals. For some time Thaler taught at Cornell, a very good school but not a top top school of the kind where many Laureates might teach, such as Harvard or Chicago or MIT. Many people were surprised when finally he received an offer from the University of Chicago Business School, noting of course this was not the economics department. Obviously this Prize is a sign that Thaler truly has arrived at the very high levels of recognition. When Daniel Kahneman won some while ago and Thaler didn’t, many people thought “ah, that is it” because many of Thaler’s most famous pieces were written with Kahneman.
Very lately Thaler on Twitter has been making some critical remarks about price gouging, suggesting we also must take into account what customers perceive as fair. Here is his earlier piece about fairness constraints on profit-seeking, still a classic.
The Swedes are giving these prizes earlier in the morning than they used to!