Prof Richard Thaler | Full Q&A at The Oxford Union

[Music] professor Taylor thank you so much for joining us it's a real pleasure pleasure so just to talk about behavioral economics at first you you might think that all economics is about how economic actors behave so what's behavioral economics and what's non behavioral economics so herb Simon who in some ways was a predecessor of mine had a line about that and he said that behavioral the term behavioral economics is pleonasm which even oxford students probably don't know what that means it's a redundant phrase and he was making exactly the point that you're making which is

you would think that economics would be about the behavior of people in markets because there are no markets without people well actually now there are there are markets with algorithms but there there weren't such markets in Simon's day and certainly most of what we talk about is markets with people labor markets and consumer markets and so yes you would think that economics would be behavioral and it was Adam Smith was the first Bayville economist and in the Theory of Moral Sentiments his first book he talks about what we now call loss aversion and he talks

about self-control problems he has a kind of - self model economists often say it's all in Adam Smith and that includes behavioral economics so yes it it I I think economists lost their way in the period after World War Two when the first big mathematical revolution took place and it turns out that the easiest mathematical models are those that assume complete rationality and anything else is a little messy and so the people that started this revolution people like Paul Samuelson and Ken arrow and we're writing down models of people being smart and selfish and then

I would say that each decade the agents in the models got smarter and that made the models less and less realistic and I once had a line at a conference talking to the economist Robert barro who has highly rational models and I said to him that the difference between us is that in your models you assume that people are as smart as you are and in my models I assume there is dumb as I am and he agreed you have loads of these great stories that you used to illustrate your theories there's this one that

you tell about self-control and a bowl of cashews do you want to go into that now and tell us what we learned from that sure so it's a true story back in graduate school I had some people over for dinner a fellow economics graduate students and there was some something cooking in the oven smelling good and there were some adult beverages being served and I brought out a bowl of cashew nuts and people started eating them as one does and after a while half the bowl was consumed and I was worried about our appetite and

so I grabbed the bowl and took it into the kitchen and hid it and when I came back at first of all we won thanked me God thank God you got those cashews out we would never have stopped eating them but then being economists they noted that we actually aren't allowed to be happy because the very first axiom of economics is more choices are always better and before we have the choice of eating nuts or not evening nuts now we don't have that choice so we must be worse off so why are we happy and

Here I am 40 years later that I mean I made a career out of that bowl of cashews it you know the the the economics columnist Tim Hartford lives in Oxford and he did an interview with me this summer where we had lunch called lunch at the FT you can and we we sat down at this restaurant and the first thing he asked the waiter is do you have any nuts and they had salted almonds can we have those they plunked those in front of me and was taunting me with those nuts during the entire

interview and I exercised all of my self-control and took one not as I left and you can find tim somewhere around time he will confirm that story so this way of finding interesting stories where we behave in strange ways that you might not predict on the rational framework is that is that part of the methodology of behavioral economics or is that something fun well it was my method you know I I started with something I called the list so I started collecting examples of things like this where people did they that economic theory predict predict

or the was counter the economic theory but I had no idea what to do with it and it was just a list of stories and all I could do with it was annoy a con amidst s-- and I couldn't figure out a way of earning a living by Annoying economists or at least that couldn't be the only thing I did and then I met these two psychologists Daniel Kahneman and Amos Tversky this is in the late 70s and they were in the midst of their pioneering work and well what they were showing is in their

original work that when people make judgments they they use simple rules of thumb and that's fine it's good to use rules of thumb but that the use of these rules of thumb lead to predictable mistakes and that idea was my big aha moment and the the reason why it was an aha moment is Simon who I mentioned earlier had coined the term bounded rationality but he had been unable to explain to economists how boundedly rational behavior was different than rational behavior and condiment averse key came along and said in technical terms the error terms are

not don't add up to zero there are systemic mistakes so and I was often running so what are some of the systematic mistakes well for example one of the first things I discovered and Kahneman Tversky discovered it and independently was systematic difference between buying and selling prices so I my PhD thesis was on a very practical problem in cost-benefit analysis which is how to value saving lives build a safer highway and you save 100 lives a year well you don't save them actually you prolong them but so how much is that worth and the way

I I did my thesis was I got some data on how much you had to pay people to take risky jobs and so it was a very rational economic exercise but to amuse myself I thought I'd go ask people questions and so I'd ask people like by attending this event today you've exposed yourself to a one in a thousand risk of death we have a cure in this bottle and we'll sell it to the highest bidder how much will you pay question two same disease quick and painless death next week one in a thousand risk

how much would you have to be paid to volunteer to undertake that risk and economic theory says that the answers to those questions should be approximately the same but the answers I got were different by orders of magnitude so people might say I'd pay a thousand dollars for that cure but you I wouldn't do that experiment for a million dollars yeah I'm not sure I believe the second answer but that was the intuition and that led to what I call the endowment effect that once you have something you don't want to give it up but

you wouldn't buy it and I you know I was collecting stories what my professor was a wine collector and he had bottles of wine that he had bought for $5 and were now worth a hundred and he would drink one on occasion for a special occasion but he would never buy a bottle of wine that cost more than 30 and I was making fun of him you know this that's not rational if you're not willing to buy a bottle for a hundred you shouldn't be willing to drink one for hundred and but that made it

into my paper and I remember when I finally got that paper published after it had been rejected about 10 times I sent him a copy and there was this example about professor R and I said here you go and I got a handwritten note back from him that just had two words ah Fame it wasn't granting me that I was right so maybe the most famous application of these insights is the nudge so what's the nudge so let me tell you I like telling stories so I was concerned I'm gonna get to answer your question

a problem that I've studied over the years is how to help people save for retirement that's in the application of studying self-control so helping people not eat cashews is not the most important problem in the world but you know if an economist studies saving behavior the economic theory of saving behavior is people figure out how much they need and then they do it and that's a hard problem cognitively and it requires delaying gratification for decades so people aren't very good at that and with one of my students I created a solution to that that I

called save more tomorrow and the idea was that we invite people to increase their saving rate not now but in a few months because we all have more self-control in the future many of us are planning diets but not tonight and so we called that save more tomorrow and I nted a paper on that at the University of Chicago the home of rational economics and showed that we had been able to quadruple saving rates in some firm by using this strategy and my discussant was he was angry and at the end of his diet discussion

he said well yeah I guess you know these numbers are impressive but isn't this paternalism now you have to understand that at the University of Chicago there's no deeper insult then to call someone a paternalist you know Packers fan that's bad but paternalist well so I said you know well I hadn't I actually hadn't thought about it that way because we normally think of paternalism as involving coercion like prohibition was paternalistic and there's no coercion in this this was opt-in so I said well I guess it's paternalistic but maybe it's you know is some different

kind of paternalism I don't know maybe we could call it libertarian paternalism well that really made a man and I had a very good friend Cass Sunstein the most proficient law professor in the world and most influential and we would have a weekly lunch and I went and had lunch with Cass and I said you know I told him the story I said you know I came up with this interesting phrase libertarian paternalism and I think it annoys everybody maybe we should write about that and so we started I wrote my version of a paper

with seven pages and then he wrote his version of the paper and he's a law professor so it was 80 pages and that looked like a book to me so maybe we should write a book and so the book was about libertarian paternalism but nobody would buy that book so we created a series of libertarian paternalistic actions and we came to call them nudges and now that I think about it we got the that term and the title of our book from an editor at Oxford University Press had not made that connection until this minute

now I will say they declined the book which they now regret but we I got this very nice note from an editor in the New York office saying yeah we love this idea but there's some turmoil in our office right now and and we can't do it but you know reading the proposal made me think of the word nudge and it's kind of a fun word and you know and as soon as I read that yes yes that's what we need and so what what is a nudge a nudge is something that attracts your attention

and influences your behavior in a way that would not influence the behavior of rational economic agents and so we wrote that book and then somebody who a guy called Rohan Silva read the book and he was working for the Conservative Party at that time when they were out of office and he bought 10 copies I think he cleaned out every bookshop in London and put a pile of them in the Tory Party office and David Cameron picked up one of them and that led to the so-called nod JUnit which now has 200 employees and offices

around the world so what are some of the things you think they've done well based on your ideas well a lot of a lot of the a lot of the nudges involved the choice of defaults so whatever is the default like when you get a new phone there are million settings and you open up the oan and works right away which is great and there are a lot of settings that Apple or whoever has decided for you and many of them you just keep and so that's a that's a powerful nudge and it satisfies a

nudge because you can change it like the ringtone you can pick your own ringtone you can pick how loud it is but many of the settings are the ones that were the way the phone came so if we go back to saving one of the most powerful nudges is what's called automatic enrollment and that nudge it wasn't you done by the nudge unit but there's a nationwide retirement saving plan in the UK called nest and there's a guy called Adair Turner Lord Adair Turner who was in charge of the details of this new retirement scheme

and made the controversial decision to use automatic enrollment rather than make it mandatory and he was heavily criticized for that but it's worked so about 92 percent of UK workers are in this pension scheme and now they're in the process of phase two to save more tomorrow phase that the saving rates are gradually being escalated so that's one example there's a whole series of nudges that involve just reminders so the there's an experiment where you [Music] parents get a text if their kid as a paper due the next day or an exam you guys would

hate this but maybe Oxford should administer this but so that turns out to work there's one I'd like it was done in the US where we have this opioid epidemic and many people get addicted to opioids because they have an accident and they need painkillers and they get addicted to them and so there was a program that doctors whose former patients died got a message informing them that they had been the first doctor to prescribe opioids to this guy who just died and they're the size of the initial prescriptions Falls by 40% so you can

see all of these are satisfied the libertarian paternalism rule that nobody is forced to do anything and now I should say I when people ask me to sign a copy of that book I always sign it nudge for good and that's because you you can use these tools for good or evil we didn't invent them they've existed as long as there have been people Eve was nudging Adam with that Apple we we men would be perfect if not for that maybe so I recently coined a term for evilness Jing and I call it sludge and

so here's an example when my more recent book misbehaving came out the first review came out in The Times not our times your times and my editor sends me an email oh your first review is out here's a link and I go click on the link and as you probably know there's the tightest paywall in all of publishing and I can't read my review and I want to read it so but there's there's an offer I can get a trial subscription for one pound one-month trial subscription so I said I'm willing to pay a pound

to read this review but then you know I wrote that other book so I read a little of the fine print and I see that to cancel you have to give 14 days notice so this one-month trial is only two weeks and to cancel you can't do it online you have to call London not on a toll-free line and in London business hours and who knows how long it will take them to answer the phone so I emailed my editor back and said you subscribe because I knew if I subscribed I would have a lifetime

subscription to The Times so that's sludge and that practice is actually pretty common so here's a useful tip before you subscribe to anything and I encourage you to support good journalism see what it takes to cancel and I try to convince publishers and other providers of services that it should be as easy to cancel as it is to join and if you have to go through a bunch of Hoops to get out that sludge and I'm on a campaign to remove sludge so looking at this from the other side there are loads of these evil

nudges that even if they're not necessarily bad we might not think are good for us like when Netflix will play the next show automatically unless we tell it not to right so how do we protect ourselves from these well you can turn that off so look we can all right here's another term so we can do self nudging I call those smudges I don't have rhymes for nudge for everything but so you know that's a setting and you can turn it off I don't particularly find that one annoying you know I'm cabe it's one thumb

click right so I'm capable of turning the the TV off or closing what a the iPad whatever you're watching this on so so if it was very annoying you know if if suppose you had to type your password to turn it off oh that would be horrible and the Oxford Wi-Fi oh man the sludge in capital letters at least for visitors for everyone yeah so everybody here right - the IT office and you can tell them professor Taylor says that the Wi-Fi system is sludge okay I think we'll open it up to the audience now

so stick your hand in the air I will pick you a microphone will come your way stand up when you got the microphone and we'll go over here first yeah yep the woman in the blue yeah hi sorry I wasn't sure you meant I'm Kira it's so lovely that you've come here thank you so much there I had a question I'm a psychologist working in behavioural insights and I aspired to do a PhD and become a professor what was the most significant challenge that you face in academia and how do you cope with it and

not let it ruin your life well certainly early in my career the biggest challenge well the biggest challenge was figuring out something to do with this and and I I wouldn't have had a career if I hadn't discovered counterman and Tversky I I claim to have discovered them people say they existed before that but economists hadn't discovered them so and well they gave me some models of what kinds of experiments to run even to run experiments because economists weren't really running experiments at that time and and then broader it was to figure out what kinds

of studies to do that would convince economists and that also was what was necessary to get them accepted in economics journals which was the only place I could publish so that was the biggest obstacle and it took a lot of persistence and stubbornness so the the paper that more or less led directly to my Nobel Prize I think was rejected ten times and it was only published because there was a new journal that got started that I heard about and I sent them this paper and I said if you promise to put this in the

first issue I'll submit it here like I had bargaining power but so anyway they agreed to that and it came out and one lesson I learned from that was it's more important to get stuff out than it is to get it into the best journals at least for me that was the case I didn't have the choice of getting it into the best journals so later on I figured out how to do that but in in the early days it was get it out and get people reading it and then I think the most important

thing that I did to create this field was to encourage young people to go into it and like you so just do it let's have another question and let's go to the the man in the aisle here yep no closer to me yeah yeah hi Roger Lewis I'm my research is focused on public policy failure and like my research is focused on public policy failure and administrative failure so I'm very much into Herbert Simon who I think you mentioned earlier I'm just interested but obviously a lot of your research is focused on how to nudge

consumers or politically the electorate to think in certain ways they really think otherwise but a lot of the time I spend examining particularly decisions at the UK government and other states is very poor quality decision-making by legislators by civil servants so how can we as electors and citizens to encourage our governments to make better decisions and to nudge them into making better judgements see now why would you ask a question like that this week well well I have no cure for either Parliament or our current president I did have a debate with a friend of

mine at the University of Chicago Booth campus a couple of years ago where this would have been a good debate for you guys which was whose government was worse and I proposed that we flip a coin at the beginning to decide which side we would have to take we didn't end up doing that but so I have no cure for those big problems but I looked the the Nobel Prize that was announced this week is a good example of how to scientifically inform policy and so Esther Duflo and Michael Kramer and Abhijit Banerjee they won

the prize for running field experiments in poor countries and they're trying to figure out what works and not everything you try works a lot of stuff doesn't work and a lot of times even if it works the first time it doesn't work when you try to replicate it so the UK behavioral insight team that's what it does for a living is it tries ideas there was a big project on how to get people back employed when they're unemployed and when we were first getting starred in 2010 there was high unemployment so this was a big

issue and not everything works so try stuff run experiments if it works run it again with a bigger sample and trial and error and you know sometimes we can use some basic psychology you know my the meta lesson from nudge is if you want people to do something make it easy start with that and you know that's what nudges are most of the time so automatic enrollment the easiest thing is you do nothing people are really good at doing nothing you know if you want to cure yourself of the Netflix addiction it it would be

nice if they had the option of saying okay I'm gonna watch two episodes and then turn yourself off and if it may be that they have that option then they don't tell you but actually the ahead of Netflix is pretty smart guy I bet he'd be willing to put that idea in if somebody suggested it to him maybe I'll suggest okay alright let's go for another question right here in the aisle in the tan suit yeah Thank You professor for coming and I think the idea of libertarian paternalism is very interesting but I it seems

to me that the difference between that and flat-out paternalism is only by degree that both recognize that basically people don't know what's good for them that one seeks to change their decision making by force and the other by you know nudge or in some ways people some would say also by deception right so what do you think is the fundamental difference between these two and may also ask what what are your views on paternalism thank you so well I think there's a clear distinction so every policy that we advocate in our book has no coercion

now making something the default is pretty powerful so it is true that we have some power and it and you know sludge is using the same tools it's also no coercion all right I don't have to subscribe to the times I chose not to so but I I think the error and we were actually talking about this a bit before it's an error to think that we should stop doing sensible policies because it could lead to policies that aren't sensible and instead we should just not do the things that aren't sensible and it's a pretty

bright line for me and and certainly paternalism doesn't always lead to more paternalism in the u.s. we had prohibition now that didn't lead to say banning cigarettes maybe it should have instead it led to repeal so and you know we've been nudging for 10 years and I haven't seen an overwhelming increase in paternalism around the world instead what I've seen is an explosion of nudge units there are now 200 at last count that are trying scientifically-based policies that don't coerce anybody into doing anything and stick to that that's the discipline I think we probably have

time for one last question and let's just go to the woman of a very back row thank you for being your professor speak up I said thank you for being here I read your book last year and I realized the more I became aware of the power power and also the kinds of various kinds of nudges the less effective they were on me because I was aware of the potential power that they had to influence my behavior so do you think the Besim that's a sort of you know is that counterintuitive that the more you

became become aware of how potentially powerful a nudge can be the less effective it becomes on having that effect on you so do do you use an alarm clock not not know nor doesn't know okay so there goes that idea well I do or I don't get up so and I I think you know you maybe you either have remarkable self-control or none and and I don't know which but you know we all find ways of controlling our own behavior and you know I know people who get up at 5:30 in the morning and go

run ten miles I don't you know it would be good for me if I did but there's no nudge in the world that's gonna get me to do that so you know you you you do what works for you and if you're creating your own nudges maybe you'll have to be a little more creative although if you don't need an alarm clock maybe you don't need them in fact we can't actually have one more question that people you know let's go right here um thank you again for being here tonight my question was regarding moving

forwards so you've set the theory my question was how how can you integrate this human behavior into an economical or mathematical framework or model is that something that is possible so absolutely yes there's a small army of economists around the world doing that it that started pretty early to two of the pioneers in that happened to both be in Harvard economics department Matthew Rabin and David Laibson so they did well with with with that research program and but what I'd say is there are vast domains and economics that haven't really been explored behavioral macroeconomics for

example there's some things got my my Mike Woodford is doing some things but I would say the world's greatest behavioral macro economist was John Maynard Keynes and if people went back and read Keynes and tried to take it seriously that would be a good place to start you know there's a big field called behavioral game theory that one of your professors who's sitting in the front row helped pioneer along with a good friend of mine Colin camera that that field is not finished and I mean if you think about so how game theory started by

modeling to rational selfish agents and so what what is your best response if you're playing a game with somebody else who's rational and it rationality is what we call common knowledge so he knows that I know that he knows that I know that he knows we're both rational and essentially that thing is never true and we have experiments that show that so what should we do and there are lots of different games and some of them have been studied and some haven't and there's an infinite number of games yet to be invented so you know

those are just two of their just any branch of economics there are aspects of it we're injecting a little bit of psychology would help the the method that has been most successful is change one thing at a time so you have perfectly rational agents except that they have self-control problems or are overconfident or are loss averse well we call reference dependent there so here's a prediction there will never be a complete theory of behavioral economics because just there is no complete theory of psychology and it would have to be a complete theory of psychology and

sociology and right because we're influenced by other people and so every once in a while a student comes into my office with a very ambitious program to create the general theory of behavioral economics and I say come back with something that you can do in less than a lifetime because you want to get a job so let's have a theory of one thing and so there's lots to do and as I talk in the Economics Department earlier this weekend there was a slide I didn't get to was my final slide and I'll use the line

I didn't get to here which was a skiing analogy there's lots of untracked powder go out fun that's a great place to finish can everyone please join me in thanking [Applause] you