An undistinguished student
Richard H. Thaler was born on September 12, 1945, in East Orange, New Jersey, into a Jewish family. His father, Alan, born in Toronto and a mathematics and physics graduate of the University of Toronto, spent most of his career as an actuary for the Prudential insurance company in Newark. His mother, Roslyn (née Melnikoff), had been an elementary school teacher before having three sons, Richard and his younger brothers Donald and Maurice, and later became a real estate agent. Apart from two years in Los Angeles, he grew up in New Jersey, mostly in Chatham.
By his own account his school career was undistinguished. Mild dyslexia, a habit of daydreaming and a dislike of tedious work held him back, and his exasperated father once tried to teach him discipline by making him copy the first two pages of Tom Sawyer perfectly before he could go out to play; after days of frustration on both sides, his father gave up. His parents moved him to Newark Academy, a demanding private school, where he worked harder and got plenty of practice writing. He then studied at Case Western Reserve University in Cleveland, where his favourite subjects were economics and psychology, a combination that would define his career.
The value of a life
Thaler went to graduate school in economics at the University of Rochester, earning an M.A. in 1970 and a Ph.D. in 1974. His first thesis topic, on why infant mortality was so much higher among Black mothers than white ones, did not land him an academic job, and the consulting firm that hired him fired him days before he was due to start. Rochester’s business school dean gave him a one-year teaching post, and he used the second chance to switch to a new thesis question: how should society put a value on saving a human life?
Governments make that judgement constantly, in highway safety, environmental rules and health care. The method then in use valued a life by the earnings it would produce, which implied that saving a retired person was worth nothing. Thaler instead estimated how much extra pay workers demand to take risky jobs such as mining or logging, using occupational mortality data that his actuary father tracked down. The resulting 1976 paper with his adviser Sherwin Rosen became well known, and the willingness-to-pay approach it advocated is now widely used to judge whether safety and health regulations are worth their cost.
A list on the blackboard
While working on the thesis Thaler asked people two versions of a question: how much they would pay to remove a small risk of death, and how much they would need to be paid to accept the same risk. Economic theory said the answers should be about the same. They differed enormously. Intrigued, he began keeping a list on his office blackboard of ways in which people behaved differently from the rational, calculating individuals in economics textbooks: valuing things more simply because they own them, refusing to ignore sunk costs, struggling with self-control.
In 1976 a chance car ride with the psychologist Baruch Fischhoff led him to the work of Daniel Kahneman and Amos Tversky, who showed that people using mental rules of thumb make systematic errors. For Thaler the key word was systematic. If people’s mistakes were predictable, then economics could predict them too. He spent 1977 and 1978 at Stanford working alongside Kahneman and Tversky, and he joined Cornell University in 1978, where he became founding director of its Center for Behavioral Economics and Decision Research.
Building behavioral economics
Thaler developed a series of ideas that are now standard. The endowment effect, which he named, describes how people demand more to give up an object than they would pay to acquire it; in a famous experiment students given Cornell coffee mugs would not sell them for anything near what other students would pay. Mental accounting explains why people treat money differently depending on where it came from, splurging a tax refund while scrimping on wages. With Hersh Shefrin he modelled self-control as a struggle between a far-sighted planner and a short-sighted doer within each person. His experiments with colleagues showed that ideas of fairness matter: people will give up money to keep a split they consider just, and will pay a personal cost to punish those who break fairness rules.
He also helped found behavioral finance, showing with Werner De Bondt that stock markets overreact to news. From 1987 to 1990 he wrote a column called Anomalies in the Journal of Economic Perspectives, documenting behaviour that standard theory could not explain; many economists say it was how they first discovered the field. With Robert Shiller he ran a behavioral finance conference for nearly thirty years, and with Kahneman and Colin Camerer he helped start a summer school that trained a generation of young behavioral economists. In 1995 he moved to the University of Chicago’s Booth School of Business, the heartland of rational-choice economics, where he is the Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics.
Save More Tomorrow
Thaler’s research on self-control led to one of the most practical inventions in modern economics. Many people know they should save more for retirement but find it painful to cut their spending today. With his former student Shlomo Benartzi he designed Save More Tomorrow, a voluntary plan in which employees commit in advance to put part of their future pay rises into retirement savings, and stay in the plan unless they choose to leave. At the first company to try it, 78 percent of employees offered the plan joined, and participants’ average saving rate rose from 3.5 percent to 13.6 percent in less than four years.
Combined with automatic enrolment, in which workers are signed up for a pension plan unless they opt out, the idea spread rapidly. When joining is the default, participation rises dramatically, with opt-out rates averaging around ten percent. The U.S. Pension Protection Act of 2006 encouraged employers to combine automatic enrolment with automatic increases in contribution rates, and by 2011 most American employers offering 401(k) plans used automatic enrolment. Benartzi and Thaler estimated that automatic escalation alone was adding billions of dollars a year to Americans’ retirement savings.
Nudge
At Chicago Thaler began collaborating with the law professor Cass Sunstein. Their 2008 book Nudge: Improving Decisions About Health, Wealth, and Happiness argued that governments and companies inevitably shape choices through how they present them, which they called choice architecture, and should design those choices to help people do what they themselves want, while leaving them free to choose otherwise. They called this libertarian paternalism. Examples range from pension defaults to simpler health insurance choices, clearer energy bills and better school choice information. They argued that for organ donation, prompting people to make an active choice works better than simply presuming consent.
The book caught the attention of policymakers around the world. In 2010 the British government created the Behavioural Insights Team, the first government nudge unit, with Thaler as an adviser, and the United States and many other countries followed. By 2017 Thaler counted about 75 nudge units worldwide, using simple changes such as clearer letters and better defaults to help people claim benefits, pay taxes on time and save energy. In a 2021 update, Thaler and Sunstein added a warning about sludge: needless friction, such as subscriptions that are easy to start and hard to cancel, that makes it harder for people to get what is good for them. Critics have argued that nudging can be paternalistic or can overlook people’s ability to learn; Thaler has insisted that a nudge must always leave people free to opt out.
Recognition
Thaler served as president of the American Economic Association in 2015 and was elected to the National Academy of Sciences in 2018. In 2017 he received the Nobel Memorial Prize in Economic Sciences for his contributions to behavioural economics. The Royal Swedish Academy of Sciences said his work had built a bridge between the economic and psychological analyses of individual decision-making. He has said that the prize was largely for work he did in his Cornell years. He wrote a lively history of the field, part memoir, Misbehaving: The Making of Behavioral Economics (2015).
Family and background
Thaler comes from a Jewish family in New Jersey; the Jerusalem Post reported his prize under the headline that a Jewish American had won the Nobel Prize in economics. He has not written publicly about religious practice, and his own memoir of his early life focuses on family, school and the accidents of an academic career. At Case Western he met his first wife, Dianne Shiff, with whom he has three children, Greg, Maggie and Jessie. He later married France Leclerc, a former marketing professor at MIT and the University of Chicago who became a photographer of ancient cultures.
He describes himself as a rabble-rouser who enjoys challenging conventional wisdom, and he has written candidly about the emotional cost of having economists he admired dismiss his work. Daniel Kahneman remained a close friend until Kahneman’s death in 2024.
Legacy
Thaler helped change economics from a study of how perfectly rational people ought to behave into a study of how real people do behave, with all their procrastination, loss aversion and attachment to their own coffee mugs. That shift has practical consequences. Because of automatic enrolment and automatic escalation, many millions of workers in the United States, Britain and elsewhere now save for retirement without having to overcome their own inertia. Governments design forms, letters and default options with human nature in mind. His hope, written into every copy of Nudge he signs, is that these tools will be used to nudge for good.
Sources & further reading
Richard H. Thaler, Biographical, NobelPrize.org · Popular information: The Prize in Economic Sciences 2017, NobelPrize.org · Behavioral Economics and the Retirement Savings Crisis, Chicago Booth Review · Economics Nobel nudges behavioral economist into the limelight, Science News · Jewish American wins Nobel Prize in economics, Jerusalem Post · Richard Thaler, Wikipedia · Researched from the sources above and checked against them. Spotted an error? Tell us.
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