You're saying that we're all humans and humans are irrational. And it's... I don't use the word irrational. I would say that we're human and we don't behave according to the models that economists write down and call rational. I'm Bethany McLean. Did you ever have a moment of doubt about capitalism and whether greed's a good idea? And I'm Luigi Zingales. We have socialism for the very rich, rugged individualism for the poor. And Mrs. Capital Isn't a podcast about what is working in capitalism. First of all, tell me, is there some society you know that doesn't run on greed? And most importantly, what isn't? We ought to do better by the people that get left behind. I don't think we should have killed the capital system in the process. This episode comes to you from a special live taping at the academic home of our podcast, The Stigler Center, where we interviewed one of the most famous living economists. We were lucky enough to be joined on stage by none other than Nobel Prize winner Richard Thaler, whose groundbreaking work helped launch the field of behavioral economics. Behavioral economics has completely changed the way scholars, experts, and even lawmakers think about how real human behavior, messy, emotional, and often irrational, shapes markets, policy, and power. At a time when our politics is fraying, tech companies are changing the rules of the game and the economy feels on edge. Thaler's ideas seem more urgent than ever. In this conversation, he reflects on the limits of traditional economics, the power of small policy nudges, and what it really takes to build systems that work for real people, not just the rational actors that exist in economic papers. You've argued that the impact of your work has been more limited than it should be, that, quote, mainstream economic textbooks remain firmly anchored in the standard neoclassical framework, and that when behavioral economics does sneak its way into economics textbooks, they report it most often contained in its own chapter as this annex of curiosities that is apart from the larger narrative. If it seems obvious to everybody that people aren't 100% rational economic actors, why did the field of economics decide that they were? Okay, that's a great question. And I will say this wasn't the case before World War II. So if you read Adam Smith, let's say economics starts in 1776 with the wealth of nations. Adam Smith talks about overconfidence. He talks about self-control problems. He talks about fairness. You know, it's all in Adam Smith. When George Stigler was, he was alive when I came. I mean, he used to say it's all in Adam Smith. And that's true of behavioral economics. It was all in there. I think the idea of the optimizing agent kind of got carried away starting with the process of economics becoming mathematically formalized. Paul Samuelson, Ken Arrow, the people who took over the profession, those two could have won the first 10 Nobel Prizes if they had been giving them out appropriately. So there was a lot of work to do. And if you're going to write down a formal model, the easiest one to write down is of people choosing optimally. I mean, think about a simple task. You have a rectangle. And I tell you the dimensions. And now we're going to guess what will people think is the area? Well, a really easy thing to do is to multiply the height by the width. Right? That's a model even I can write down. Now, it might be that people have width aversion that the estimate they'll give will overweight the height versus the width. I'm making all that up, right? But you can see that that model is getting more complicated. So people started writing down these formal models. And then a weird thing happened. Like in the 70s and 80s, the agents and economic models kept getting smarter. I mean, they started out smart, right? Perfectly smart. But then somebody like Robert Barrow would come along and think of, oh, here's a way that people could be even smarter. So instead of reacting to some tax change in the best possible way for you, well, you might also take into consideration your kids and their kids, right? No one in the history of the world had ever had that thought until Robert Barrow wrote it down in a model. And now it's a model of everyone, right? And the norm, I would say, in this period of the 80s and 90s was my model is better than your model if my agents are smarter than your agents. Like when you came into the world, Luigi, in the 90s, that was the world. And it was very heavily represented in our economics department. And that's kind of the world in which there was an opening for people like me. Because look, people try to optimize. I don't say they don't. It's hard. Think of the model of saving for retirement. All you have to do is estimate how much you're going to earn over the rest of your lifetime, how long you're going to live, what rate of return you're going to get, solve, then never get tempted by a new car or a lavish vacation, certainly never get divorced. Right? So, and then you have to, you know, if you get as old as me each year, you have to update, oh, well, I've made it this long. I might live too long. Right? So, I once, at Cornell, I was giving a talk on saving for retirement and described that model. And it was in the psych department. The audience starts laughing hysterically. And fortunately, my friend Bob Frank, an economist there, assured them, actually, I was not making this up. This is not a caricature. This is the model. Two Nobel Prizes, first Friedman and then Modigliani. So, right, this is the model. And there really isn't an alternative one. I mean, we sketch one. But people aren't perfect. Right? That shouldn't be controversial. The idea that people have self-control problems, it's in the Bible. Right? I remember, I gave a talk once in Jerusalem, and I used the word temptation. And somebody said, define temptation. And somebody in the audience said, it's in the Bible. So, right? So, it's not like I'm inventing new things. Right? It's in Homer. So, it goes back to Bethany's question. Wasn't this obvious to everyone? It was obvious to everyone who wasn't an economist. But that didn't mean that it was easy to convince economists that they should pay attention to it. Can I correct you slightly? I think that... You can try. I'm glad I'm sitting in the middle here. I think that what you underestimate in this evolution is two facts. Number one, the tension in seminars. So, the reason why the models are escalating, becoming more and more rational, is because at the time, there were very little data. Everything was theory. And so, you're confronted with other smart people in the room. The only way in which you can win is by being smarter than the other. And so, every model with agents, smarter than the other. Because nobody confronts the fact, because the fact the data are not there. We have some aggregate statistics, but it's very difficult to make a sense of any of those. And plus, certainly, all these deviations are not so big to... And so, the game in town is, how can I asmart you in this kind of chess game? And so, that's the reason why the initial rational hypothesis escalate to the extreme. To your credit, the difficulty is saying the obvious. Somebody was saying, is very... The most difficult thing is to say what is in front of you. But why? Is because you get a lot of negative sort of a reaction. So, when you are going to the room and you are saying the obvious thing that you're saying today, most people say, that's too easy. You're not smart enough. And they did not consider you so much so that you didn't get the first offer on the job market. And only with the explosion of data, particularly individual data. Then you see that all these things are pervasive and first order. And you can demonstrate with the data. Honestly, even in your book, there is no real grand theory. So, they're just a bunch of facts, but very important. And I think that that's what in my view has brought the transformation is the availability of data. Because today, in seminars, there is no debate on smarter than you, because my agent is more rational, is I have better data than you have. Yeah, no, that's right. So, there's an old story of I gave a talk over in the economics department and talking about the retirement saving. I pointed out that the evidence is very strong that the saving rate increases with permanent income. Now, everybody says, of course, that's true. Where does Bezos have time to spend it? How many weddings in Venice can the guy have? Actually, in this, we did divorce in Canada. How many yachts? So, look, that's an obvious fact. The low income people are basically spending everything. And then as income levels go up, the percentage that get saved goes up. So, I presented data to show that. And Gary says, well, maybe the poor are saving via their children's human capital. I tried to keep a straight face. Didn't notice that many kids of poor people are going to hand over. So, I said, well, what about the childless poor? What are their saving rates? He was so fast. He says, they might have nieces and nephews. So, my friend Amos, this became like a thing with Amos and me, that he used to say, when they start talking about the nieces and nephews, you stop. You won, but you're not going to get a concession. You've won, time to move on. But yes, you win with data. And look, in this book, Alex and I, what we do, and what I mean by we is Alex, go back to these articles that I wrote 30 years ago on anomalies, and we go back and say, were we making this up? Does it hold out a sample? Can you replicate it? That was the key thing to keep showing that it works. And originally, we're running experiments. Now, you can, you get data, individual data, and like big data. So, it's harder to make arguments about nieces and nephews when you have seven million data points. So, I want to explore some of the ramifications of this. If many of the theoretical justifications of the efficiency of capitalism are based on this assumption of a fully rational economic actor. So, if you incorporate your contributions into that framework, what's left of these theories? Well, say we have to enrich the theories. We as economists, I'm going to put my economist hat on. Economists are not famous for humility, I would say. Say nothing. You say so. And so, if we had a hard line economist here, they would say, well, you know, as if the most dangerous two words ever uttered in economics by Milton Friedman, who argued people, yeah, maybe they don't know how to maximize, but they're behaving as if they're maximizing. No, they're not. They're not close. But you need to say, all right, how robust are the models? And how far are you pushing the idea that people are optimizing? And in a lot of models, again, the new version of being smarter is models that are like structural models. And I'm not going to say what that is, but it's sort of embedding the rational theory into the assumptions of the econometrics. And then that just kind of gets hidden. So if supply and demand is still true, right, comparative advantage is still true. It's not popular in some parts of the country, let's say, right now, but I'm pretty sure the comparative advantage is true. I'm better at being a behavioral economist than a quarterback, say, you know. So I think economics still has a role. And we can still do economics based on basic economic principles, but we don't want to push it too far and say, you know, the old joke, I think you know this story that when I came here to do, give a job interview, we walked out of Rosenwald and there was a $20 bill on the, and people think I'm making this story up. Honest to God, we walk out, there's a $20 bill, I'm the only one that picks it up. Now, you know, there were people here who thought that the kind of stuff I write about cannot happen. It happens. All right, so now we need to modify the models in a way that can incorporate what real people are doing. And then it comes down to very practical things like, okay, there's a financial crisis and we're going to send people money, should we send it all in one lump, or should we spread it out? Now, traditional economic theory makes a very precise prediction about that, which is it doesn't matter. It's exactly the same. Well, it matters. But then we need data. So there's a lot more for economists to do, and they can use all this wonderful data and their models will work better. But following up on what Bethany was saying, you're not modest either. However, when it comes to policy prescriptions, you've been incredibly modest. And it says, you're venturing in policy prescriptions is nudge. And as the title says, is very gentle. You don't really intervene by saying, look, if people really procrastinate, for example, we should have a law that bans credit card company to force you to register forever and reiterate a subscription all over the place. I'm saying something silly, but I think it's actually important because we all get repaid with this office, right? Why you are not being more aggressive on that front? Well, because if you try to be more aggressive, you fail. So look, my most recent policy initiative, I was very proud this actually got implemented in the waning days of the Biden administration, was a rule I proposed that you have to be able to cancel any subscription the same way you joined. So if it's one click, it's one click. Instead of you join with one click and then you have to go in person, there were gyms during COVID that were making people show up in person to quit their subscription to a gym that they couldn't go into. This is a very modest proposal. In fact, you're saying that my problem is that my proposals are too modest. I'm pretty sure when somebody in the current administration figures out that this rule is there, that they'll get rid of it. So with retirement saving, there was a law that was passed in 2006. So this is in the George W. Bush administration. At that time, there was no automatic enrollment. There were no target date funds in retirement plans because there was a rule that for a default fund, it couldn't go down. So the only thing you were allowed to have as a default fund in a retirement account was a money market account. Believe it or not, there was a bipartisan bill passed. We got them to say it would be legal for a company to automatically enroll people, automatically increase the contributions, and default them into a prudent fund like a target date fund. What did we have to give up? If companies did those three things, they got out of some nasty paperwork called non-discrimination rules. So there's a rule that says you can't give too large a percentage of the benefits to the highest paid workers. And filling out that form is a nightmare. So there was some guy, a Republican senator from Utah, who I testified and I convinced him and he says, all right, what should we do? And I said, give back, get people out of the non-discrimination if they do all this stuff. Now, I have colleagues who are criticizing me like you. Why are you so modest? Why aren't you telling people they have to save instead of automatic enrollment? Why don't you make them save like in Social Security? And my answer is, good luck with that. How many laws have you passed? So it's like when Obamacare passed, it was by one vote. So you can say, well, why didn't they do all these other things? That was exactly as much as you could get. Maybe it wasn't the best. I think they made a lot of mistakes in there, but it was what they could get passed. And I've tried to get stuff passed. And then sometimes it gets repealed. So there's a question of what you can make people do. Is there also a question of what you should make people do? In other words, is there in your mind a distinction between good nudge and bad nudge, given that the democracy is predicated on the notion of individual liberty? Is there a point where nudging becomes manipulation? Well, yeah, we call it sludge. So it's like the subscription thing. If I get you to enroll, join for six months at a dollar a month, and then we'll automatically enroll you at $30 a month. Cass and I like to say we didn't invent nudging. Back to the Bible, the serpent and the apple, it's all there. So Bernie Madoff didn't take any lessons from me. Neither did Ponzi. There have been scoundrels as long as there have been people. I think, I mean, you say I've been too modest or too timid. I mean, the UK kind of adopted close to what I would say is the ideal system for retirement saving. And they were heavily influenced by this research, but it's not required. It's automatic enrollment. So you get 90%, you don't get 100%. But if you try for 100%, you get zero, because it doesn't pass. So one last question, because I think we need to open to the audience. You said, of course, that the scoundrels have been around since the Bible. But I think some of the more recent scoundrels, like the big tech companies, I think they seem to have adopted behavioral economics much more than our colleagues in IEO. So you go to IEO and they basically say there's perfect competition, because competition is a click away. But then you have Google paying billions of dollars to Apple to get the default, because they know that the default matters. But in IEO economics, the default don't matter. So have you explained that your research is more influential in Silicon Valley than in the academic department? Well, I deny that. Look, the American Economics Association, if you join, your membership includes subscriptions to the journals, and they were all printed until about 20 years ago. They started offering electronic subscriptions. But the default was you got them all. And they switched the default. And lo and behold, almost everybody took electronic. So I mean, economists, even economists are humans. And as you know, in the book, we end each chapter with a little bit of advice. And we have the so what for economists and then a different one for humans. I have a last question, too, since you pointed out mistakes that both Luigi and I have made. I think it's only fair if you own up to a mistake of yours. Is there anything you've done throughout your career that you wish you had said differently? No. Well, on that note. If you're enjoying the discussions Luigi and I are having on this show, there's another University of Chicago podcast network show you should also check out. It's called Big Brains. Big Brains brings you the stories behind the pivotal breakthroughs that are reshaping our world. Change how you see the world and keep up with the latest academic thinking with Big Brains, part of the University of Chicago podcast network. So it's time for Q&A. We have people running around the room with mics. I think the best thing to do is to raise your hand and someone will come to you. Let's see, there's a hand there. There are lots of hands people. So whoever gets there first. When you get a mic stand up so we can see you. Yes. Thank you for the talk. I have a question about cultural differences. All the research you've done, how applicable it is across the countries, across the cultures, is a theory about retirement savings equally applicable in the US, in Europe, in Madagascar. How different societies are behaving that way? So to a first approximation, cross cultural differences are second order. Yes, there are differences, but there's a chapter in the book about the ultimatum game. I give Luigi $100 and I tell him he can share that with Bethany and he can make her an offer. And if she says he offers her $20, if she says yes, she gets $20, he gets $80. If she says no, they both get nothing. So that was an early experiment that I wrote one of these anomalies columns about years ago. And there was follow-up work doing that all around the world. Interestingly, if I got your accent right, it might be an Israeli accent. The only significant difference was Israelis were a little bit more like game theorists. And I speculated in the original piece that that might be because Israel has more game theorists per capita than any other country. But I don't have any evidence on that. So yes, I mean, in psychology, there's a whole field of cultural psychology. But I think things like overconfidence, loss aversion, mental accounting, they're true everywhere. Yes, they'll be a little different in one place or another, but we're all humans. Hi. So I have a question about how you consolidate having like really irrational behavior and how like sometimes this irrational behavior might not even be consistent with other behaviors, like kind of adding on to that cultural question. But how do you build a model around kind of inconsistent irrational behavior? Yeah, so let me answer that and sort of pick up to one little slide dig Louie G had earlier about when he said that we don't have a grand theory. I'll make a prediction, which is there will never be a grand theory. We have one. I mean, if you want a grand theory of economic behavior, it's optimizing selfish agents with rational expectations. I mean, if you try to write down a model of all that incorporates all of the departures, it just gets too messy. So what's happened over the 30 years, say, since the I published these anomalies, there have been theories of each part. So like the ultimatum game, we now have theories that say, well, Bethany is not likely to accept an offer she views as unfair. And so she'll, if Luigi tries to offer $10, she's going to say no. And yes, she realizes $10 is more than zero, but it's worth $10 to tell Luigi, you're not going to get away with that. So even more than that. So there are lots of papers about fairness. But those papers don't explain why people are overconfident or overreact in some situations and underreact in others. And they certainly don't explain some of the anomalies we see in financial markets. So there's not going to be a grand theory. Maybe the grand theory will be a chat, what's going to happen? But that's not really a theory. I would like your perspective on if rational models are worth keeping around. And if they are, what makes them worth keeping around? So yes. And in fact, I'll say they're essential. So my good friend and golf buddy, Gene Fama, always likes to tell me that he was the most important person for behavioral finance because we would have had nothing without the official market hypothesis. And that's true. And then I remind him that he would have had nothing to do the last 30 years if he didn't have me giving him things to refute. So look, I mean, it's related to the answer to the previous question, which is, since we don't have a new grand theory, what we have are departures from the standard model. So the standard model of decision making under uncertainty is expected utility theory. It was created by John von Neumann, possibly the smartest person of the 20th century. And he wrote down a model, here's what you should do if you want to be smart in risky situations. I think it's the right model. When I was still teaching, I taught my students, do that, do that, but assume no one else does. That's my meta lesson. Ignore some costs, but assume no one else does. You were saying that we're all humans and humans are irrational. I don't use the word irrational. I would say we're human and we don't behave according to the models that economists write down and call rational. But I'm not saying it's irrational. Yeah, good. Okay. And I think it's like very, very, it's an incredible honor to win the Nobel Prize and out of my own curiosity, and I think also asking for some of our audience, how do you plan to spend your Nobel Prize award, Grant? So it's a funny story. When you find out you won the Nobel Prize, it's four in the morning. And the phone rings. Now, if you're one of the thousand people that think that they might win, you're aware that it's that day, because the economics day is always the Monday after the week of announcements. And all your so-called friends are saying, oh, good luck. I think this is your year. They've been saying that for 20 years. So you get woke up at four in the morning. In my case, we still had a landline. The landline rang. That phone was on my wife's side of the bed. She finds the headset and it's dead. And she's running around the apartment looking for a headset that works because she's here something and then it stops. And I think she's thinking, okay, Taylor, no, Doug Diamond, they're looking for Doug's phone number. But then my cell phone started ringing. And the only concession I had made to the remote possibility that this would be my ear was to turn the ringer on the cell phone. I see it on the phone that says Sweden. This could be good. So then they say, all right, go drink some coffee. You have a press conference at half an hour. And at the press conference, somebody asks me that question. They say, what are you going to do with the money? My instinct was to say, well, as an economist, that's a stupid question because how would I get to know which money? Like, if I go buy a new car, was it with that money or with the money the school pays me or from some book, right? So I answered it. I'll spend it as irrationally as possible. And I don't know how I've spent it. I haven't been keeping track. What I should have done in hindsight is a mental accounting. Yes, I should have got a special credit card, the Nobel credit card. And then if I want to buy a really expensive bottle of wine, boom, put it on that card. But I wasn't that smart. Yes, sir. My question is, why students in American colleges and universities are thought that capitalism is bad. Is it to create a new kind of behavior so that we will assume, do not make profit because you may lose? The last thing I would say, will you advise me to divest? I mean, sell my stocks and say, oh, capitalism is bad. I will not make anything out of it. Okay, so I am smart enough not to give investing advice. I have been quoted on occasion. Somebody's asked me about some meme stock or stable coin. And I've said that it's irrationally high, but it might go up. And that's the way I feel about the stock market right now. When people complain about capitalism, I don't think that they're really complaining about capitalism. I think they're complaining about, say, the distribution of income. Because we tried the other system and it doesn't work. By the way, I mean, this is a point that Ken Arrow made. If you think about a planned economy, the social planner better not be boundedly rational. Right? And if you think about like the Russian economy, it was a catastrophic failure because the problem of how many widgets you should build here, and I mean, it's just too hard. So capitalism is like democracy. It's, you know, the worst of all problems, but it's better than any alternative or whatever the expression goes. Any system can be improved. There's an interesting book, Luigi and I were talking about earlier, what is it? Breakneck. Breakneck about China. And it's written by a Chinese Canadian. He describes the difference between China and the US. China is run by engineers and the US is run by lawyers, which is stealing a line. I used to say US is run by lawyers advised by economists. But I think the premise is certainly correct, but he doesn't say that one is better than the other. The Chinese economy, I think he has a very good point that they've developed process knowledge. They don't invent things, but they can build anything. And we invent things and we can't build anything. He blames it on the lawyers. I mean, that's kind of a snappy one-liner, but the political system has made it impossible to build anything. And I think those are just obvious facts that it costs 10 times as much to build high-speed rail here as it does in China and five times as much as in Europe. And nobody really likes it. And even some liberals like Ezra Klein complain about how much it costs to build, but he doesn't say, all right, which of the 50 regulations that make it hard to build and rules about whether you have to use unions, which of those are we going to get rid of? What Cass Sunstein and I call sludge, the thing that makes it so hard to build, sludge is bipartisan. The left have all the rules on pollution and climate change and so forth, but there's also all kinds of rules that basically protect businesses. In Illinois, the rules determining who can be a distributor of alcohol were written to enrich the people who are distributors of alcohol. So I don't know who wrote those. I mean, it's a blue state, but it's a corrupt system. And so the regulations that protect incumbents, that's bipartisan. And I don't see anybody on either side that is ready to tear down the position that the incumbents have, like merges on how Google was allowed to buy ways. I mean, I don't know. How do we say we have an antitrust system when somebody has a monopoly on GPS and they're allowed to buy their competitor? So yeah, I'm pro capitalism. I don't know what this capitalism, but I'm pro, but I think it could be improved. Why is capitalism bad? I'm saying that when people protest, they think can't Jeff Bezos get by with only 100 billion? And there are too many people starving and housing is expensive. That's all true. But do we know how to create a better system? No, we don't. So I'm, you know, again, Luigi complains that I'm too modest. I don't know what the perfect system is, but I can improve it a little bit at a time. I think we have time for one more question. So a lot of your theories have influenced the Affordable Care Act, and you were speaking about it a little bit before. I would love to hear your perspective on what things you would keep and what things you feel like you would take out for the system and how you would just make it more efficient in your opinion. Oh, well, that's one. I'll tell you one. They set up these plans and there are, I don't know whether you've ever had to buy healthcare from that system, but there are different plans and they're coded by metal. There's a platinum plan and gold and silver and bronze. So I was in Washington visiting friends and I asked somebody who was designing the website, can I go see what they're doing? And so the person designing it shows me, and I have no idea what they thought, these metal categories, how that was going to help. But then at the bottom, there's another category, it doesn't get a medal, it's called catastrophic. And I said, no, wait, we're not going to call one category catastrophic, are we? And he said, yeah, no, that's what economists, so it's a high deductible plan, right? And he said, that's what economists call catastrophic insurance, right? Now, I can tell you, when you go get a job or if you're an employee at the University of Chicago, the healthcare plan you want is catastrophic. And it's guaranteed to save you money, at least $800 a year or more, if you don't spend any healthcare, it saves even more, but at least it saves you a few hundred dollars a year. People are, so we're going to give this horrible brand name to a plan that many people should choose. The other thing I criticized in real time was the mandate. So economists said, you got to have a mandate, you got to have a mandate, because if you don't, only sick people will get health insurance and then the rates will go up and we'll have a catastrophic spiral, amusing that word again. So there'll be a death spiral in the plans. Then the Supreme Court decided that the mandate was illegal and they got rid of it. Nothing happened. There was no death spiral in healthcare plans. Why? People like to have health insurance, so I think if they had listened a little bit less to economists on that, what would I have done? Big surprise. I would have automatically enrolled people into health insurance with an opt-out. There's no reason why giving people the opportunity for affordable healthcare should be something that we make seem like it's evil. Now, yes, the system is, the American healthcare system is a nightmare. For sure. We spend twice as much as any other country and we get average results. That's unambiguously true. But is there any agreement on what system you want instead? No. You go to Canada, you get national health insurance and there are cues. You might have to wait six months for a new hip. So rich people come to the US or India, but there was a series in the New York Times a few years ago where some five health economists were debating which country system would be the best and there's no agreement. So nobody has the perfect system. There's no perfect economy. There's no perfect economic system. It's math versus math. And you know what? That's life. I wanted to close with a question for the audience and for my two fellow people on the stage. How many people out there think the world would be a better place if humans were perfectly efficient rational animals? How many like our world the way it is? Massey, people being people. Thank you all very much for coming. Capitalism is a podcast from the University of Chicago Podcast Network and the Stiegler Center in collaboration with the Chicago Booth Review. The show is produced by me, Matt Haudabbe and Leah C. Zareen with production assistants from Utsoth Gandhi, Matt Lucky, Sebastian Berke, Andy Shee and Brooke Fox. Don't forget to subscribe and leave a review wherever you get your podcasts. And if you'd like to take our conversation further, also check out promarket.org, a publication of the Stiegler Center, and subscribe to our newsletter. Sign up at chicagobooth.edu slash Stiegler to discover exciting new content, events, and interesting
