Dr. Richard H. Thaler and Behavioral Economics

A behavioral scientist

By Rick Kahler MS CFP®

Human beings make most of our decisions—including financial ones—emotionally, not logically. Unfortunately, too much of the time, our emotions lead us into financial choices that aren’t good for our financial well-being. This is hardly news to financial planners or financial therapists. Nor is it a surprise to any parent who has ever struggled to teach kids how to manage money wisely.

Economic Model Assumptions

Yet many of the economic models and theories related to investing are based on assumptions that, when it comes to money, people act rationally and in their own best interests. There’s a wide gulf between the way economists assume people behave around money and the way people actually make money choices. This doesn’t encourage financial advisors to rely on what economists say about financial patterns, trends, and what to expect from markets or consumers.

2017 Nobel Prize in Economics

It’s significant, then, that the 2017 Nobel Prize in Economics went to Dr. Richard H. Thaler, professor of behavioral science and economics at the University of Chicago Booth School of Business. Dr. Thaler’s work has focused on the differences between logical economic assumptions and real-world human behavior. His research not only demonstrates that people behave emotionally when it comes to money; it also shows that in many ways our irrational economic behavior is predictable.

This predictability can help advisors and organizations find ways to encourage people to make financial decisions in their own better interest. The book Nudge, by Dr. Thaler and Cass R. Sunstein, describes some of those methods.


One example is making participation the default option for company retirement programs like 401(k)’s. Employees are free to opt out, of course, but they need to actively choose to do so.

A second example is the “Save More Tomorrow” plan, which offers employees the option of automatically increasing their savings whenever they receive raises in the future.

Both of these examples rely on a predictable behavior—human inertia. Most of us tend to postpone, ignore, or forget to take action even when that action would be good for us. So if a system is set up so not taking action leaves us with the choice that serves us better, we are “nudged” toward helping ourselves toward a healthier financial future.


As one of the pioneers in integrating the emotional aspect of money behavior into the practice of financial planning, I’ve long since come to understand that managing money is about much more than numbers. The world of investing may seem to be cold and calculating, but it’s actually driven by emotions. I’m familiar with the work of researchers who have demonstrated that some 90% of all financial decisions are made emotionally rather than logically.

I was pleased in 2002 when one of those researchers, psychologist Daniel Kahneman, won the Nobel prize in economics for his studies of human behavioral biases and systematic irrational behaviors. (That research was done jointly with psychologist Amos Tversky, who died in 1996.)

I’m even more pleased to see the economics Nobel prize go to a behavioral researcher for the second time. Maybe the realm of economics is beginning to integrate the untidy realities of human emotions into its theories. Eventually, this might lead to new economic models that take into account the emotions that shape people’s money decisions and the fact that money is one of the most emotionally charged aspects of our lives.


Perhaps economists are beginning to appreciate the truth of the statement Dr. Thaler made at a news conference after his prize was announced. “In order to do good economics, you have to keep in mind that people are human.”


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3 Responses

  1. Don’t Nudge Me: The Limits of Behavioral Economics in Medicine

    The following originally appeared on The Upshot (copyright 2017, The New York Times Company).

    Whenever I talk to physicians about outcomes that are worse than you’d expect, they are quick to point out that noncompliance — when a patient does not follow a course of treatment — is a major problem. Sometimes prescriptions aren’t filled. Other times they are, but patients don’t take the drugs as prescribed. All of this can lead to more than 100,000 deaths a year.

    A thorough review published in The New England Journal of Medicine about a decade ago estimated that up to two-thirds of medication-related hospital admissions in the United States were because of noncompliance, at a cost of about $100 billion a year. These included treatments for H.I.V., high blood pressure, mental health and childhood illnesses (it can be difficult to get children to take their medicine, too).

    To address the issue, researchers have been trying various strategies, including those rooted in behavioral economics. So far, there hasn’t been much progress. A systematic review published five years ago in Annals of Internal Medicine looked at all kinds of trials that tried to improve patient compliance. It found some limited successes in improving patient compliance in different disorders, but most of the trials were small and not easily generalized outside the research setting.

    A more recent Cochrane review concluded that “current methods of improving medication adherence for chronic health problems are mostly complex and not very effective.”

    At first glance, behavioral economics — the basis of Richard Thaler’s recent Nobel Prize in Economics — seems like a rich field of potential solutions. People tend to do things, like donate organs, when it’s the default option as opposed to something they need to request. They tend to be less likely to miss appointments if you tell them how many other patients show up for theirs. They tend to be more likely to engage in preventive behaviors like using sunscreen if you focus on the benefits, not the harms. Many are turning to ideas like these to improve medication adherence.

    But those excited about the potential of behavioral economics should keep in mind the results of a recent study. It pulled out all the stops in trying to get patients who had a heart attack to be more compliant in taking their medication. (Patients’ adherence at such a time is surprisingly low, even though it makes a big difference in outcomes, so this is a major problem.)

    Researchers randomly assigned more than 1,500 people to one of two groups. All had recently had heart attacks. One group received the usual care. The other received special electronic pill bottles that monitored patients’ use of medication. Those patients who took their drugs were entered into a lottery in which they had a 20 percent chance to receive $5 and a 1 percent chance to win $50 every day for a year.

    That’s not all. The lottery group members could also sign up to have a friend or family member automatically be notified if they didn’t take their pills so that they could receive social support. They were given access to special social work resources. There was even a staff engagement adviser whose specific duty was providing close monitoring and feedback, and who would remind patients about the importance of adherence.

    This was a kitchen-sink approach. It involved direct financial incentives, social support nudges, health care system resources and significant clinical management. It failed.

    The time to first hospitalization for a cardiovascular problem or death was the same between the two groups. The time to any hospitalization and the total number of hospitalizations were the same. So were the medical costs. Even medication adherence — the process measure that might influence these outcomes — was no different between the two groups.

    The researchers in this trial deserve praise for their frank assessment of their results, as well as for trying to brainstorm ways in which they might achieve success in the future. Getting patients to change their behavior is very hard. In the past, we’ve tried making drugs free to patients to get them to adhere to their medications and improve outcomes. That failed. We’ve tried lotteries (as in the study above) to nudge people to achieve better compliance. That failed.

    Maybe financial incentives, and behavioral economics in general, work better in public health than in more direct health care. There have been successes, after all, with respect to weight loss — although these seemed to disappear over time. We’ve also seen promise with respect to smoking cessation, although these come with caveats as well.

    Experts caution that the interventions that achieve success are often very intensive. They demand a great deal of attention, and can be quite expensive. Moreover, they are very focused, usually on a single issue or condition.

    The problem is that health has so many moving parts. The health care system has even more. Trying to improve any one aspect can make others worse. Behavioral economics may offer us some fascinating theories to test in controlled trials, but we have a long way to go before we can assume it’s a cure for what ails Americans.

    Aaron E. Carroll MD
    via Ann Miller RN MHA


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