The winner of the Nobel Prize in Economics this year, Richard Thaler of the University of Chicago is widely recognized as a major player in the behavioral economics revolution that has defied some of the standard assumptions and theories of economic theory. Along with Nobel Prize winner 2002, Daniel Kahneman, his co-author Amos Tversky (who would probably have shared the prize with Kahneman if he had not died in 1996) and Jack Knetsch, Thaler has pioneered a new way of seeing the economy taking advantage of the knowledge of psychology and psychological experiments.
Unlike several other geniuses in the field who have gone on to gain final recognition in the profession, Thaler had a fairly domestic beginning for his academic life. His doctoral thesis focused on assessing the monetary value of a human life – often used by regulators to measure the benefits of interventions that prevent deaths, for example on roads or air pollution. On the basis of his thesis, Thaler published in 1976 a very influential research work on the theory and techniques of valuing a life statistically.
Renowned economist Sherwin Rosen, despite co-authoring the 1976 article with him, was not very impressed with the young economist, who later told the New York Times: “We did not expect much from him.” Perhaps Thaler’s tenuous vision of Rosen arose from what she saw as Thaler’s deviations away from the central question of his research. In the words of his colleague and collaborator, Cass Sunstein, Thaler had an “infallibly mischievous mind.”
The “value of a statistical life” that Thaler was estimating was based on the determination of the amounts that people actually paid to incur risks in the workplace. When workers face an additional mortality risk of 1 in 100,000, how much more money does the employer give them? Even while writing a “mathematical-heavy” dissertation to arrive at the answer, he began to adjust the question itself to see if it produced a different answer, wrote Sunstein in a 2015 essay on Thaler’s work.
“He started asking people two questions,” Sunstein wrote. “The first: How much would you pay to eliminate a mortality risk of 1 in 100,000? The second: How much would you have to pay to accept a mortality risk of 1 in 100,000?” According to standard economic theory, people’s responses to The answers to the second questions were much higher (often in the $ 500,000 range) than the answers to the first (often in the range of $ 2000) In fact, some people responded to the second question, “There is no amount you could name.” According to standard economic theory, that is serious misbehavior. ”
Thaler showed her results to Rosen, who told her to stop wasting her time. But these results were more than the thesis he ended up writing that paved the way for Thaler’s seminal contributions to behavioral economics. It was not the first time, however, that a future Nobel Prize winner had been dismissed summarily by his guide. The early writings of the Amartya Sen, for example, were once rejected by their supervisor of the thesis Joan Robinson at the University of Cambridge as “ethical waste heap.”
Thaler fulfilled the same fate at the University of Rochester. But shortly after finishing his dissertation, he partnered with psychologists Kahneman and Tversky to produce a series of cutting-edge research papers that established the peculiarities of humans when faced with economic options. Thaler’s later work showed that the major differences in the answers to the two questions about mortality risk payments came from the “endowment effect”: people value goods that have more than exactly the same goods when they are in hands of others. As such, they placed a much greater value in accepting a mortality risk than in eliminating that same risk.