Richard Thaler
at University of Chicago, Booth School of Business
What you need to know about ‘Dick’, Nudges and Sludges
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at University of Chicago, Booth School of Business
By discovering a long list of “Supposedly Irrelevant Factors” influencing our decisions, Thaler’s stories of ‘anomalies’ uncovered a new human layer of irrationality, earning him a Nobel Prize for Economics as a result.
People Thaler
• It started with a bowl of cashews at a university dinner party.
After Thaler’s friends thanked him for removing the addictive nuts from the table, he wondered why people felt happier that they now had less choice; it contradicted economic theory around more choice being better! A curious anomaly…
• 1979 He saw that Kahneman and Tversky's Prospect Theory better predicted human behavior. Their finding that we use shortcuts to make decisions that lead to biases motivated him to turn his own stories into experiments…
• 1990 His famous mug experiment found that, due to Loss Aversion and the Status Quo Bias (a tendency to stick with what we have), we overinflate the value of what we own, known as the Endowment Effect or Ownership Bias.
“Creating a reputation as a “sludge-free” supplier of goods and services may be a winning, long-run strategy”
- Thaler (2018) The Evolution of Behavioral Economics
• 2004 Designed the ‘Save More Tomorrow’ program with Shlomo Benartzi to help people save more as their wages went up, using Defaults + Foot In The Door to get savings from 3.5% to 13.6% after 5 years, next to 5% without help.
• 2008 Wrote ‘Nudge’ with Cass Sunstein, defining nudges as interventions to help people make the choice they'd have made if informed and rational, happening within a ‘Choice Architecture’: the environment in which people make decisions, like a menu in McDonald’s or on your iPhone screen.
• 2018 Found, from looking at Swedish pensions, that default-based nudges last for many years, even when risk goes up! He’s since spoken out of the misuse of nudges in industry, calling them ‘sludges’.
• 2021 'Nudge - The Final Edition' was updated with new examples and a deeper dive into sludge.
• It started with a bowl of cashews at a university dinner party.
After Thaler’s friends thanked him for removing the addictive nuts from the table, he wondered why people felt happier that they now had less choice; it contradicted economic theory around more choice being better! A curious anomaly…
• 1979 He saw that Kahneman and Tversky's Prospect Theory better predicted human behavior. Their finding that we use shortcuts to make decisions that lead to biases motivated him to turn his own stories into experiments…
• 1990 His famous mug experiment found that, due to Loss Aversion and the Status Quo Bias (a tendency to stick with what we have), we overinflate the value of what we own, known as the Endowment Effect or Ownership Bias.
“Creating a reputation as a “sludge-free” supplier of goods and services may be a winning, long-run strategy”
- Thaler (2018) The Evolution of Behavioral Economics
• 2004 Designed the ‘Save More Tomorrow’ program with Shlomo Benartzi to help people save more as their wages went up, using Defaults + Foot In The Door to get savings from 3.5% to 13.6% after 5 years, next to 5% without help.
• 2008 Wrote ‘Nudge’ with Cass Sunstein, defining nudges as interventions to help people make the choice they'd have made if informed and rational, happening within a ‘Choice Architecture’: the environment in which people make decisions, like a menu in McDonald’s or on your iPhone screen.
• 2018 Found, from looking at Swedish pensions, that default-based nudges last for many years, even when risk goes up! He’s since spoken out of the misuse of nudges in industry, calling them ‘sludges’.
• 2021 'Nudge - The Final Edition' was updated with new examples and a deeper dive into sludge.
