This year’s Economics Nobel recognizes the merits of sociability.
Fruits to Nuts
Newton had the apple, Thaler had cashews.
Early in his career, Richard Thaler, this year’s recipient of the Nobel Memorial Prize in Economic Sciences, realized that his guests would eat so many cashews with their predinner drinks that their appetites would get spoiled. Some suggested, half-jokingly, that he remove the temptation. This struck him, because that request violated standard economic theory. Eliminating options should displease the diners, not delight them.
As Thaler realized, though, sometimes less is more. Some choices, such as the predinner cashews, are too enticing. They lure us into making decisions that we later regret. Other choices overwhelm. Download a video player, and most of its operating options will be hidden. Those who wish can adjust the player’s dynamic range, brightness, hue, saturation (whatever that is), and so forth, to match their personal tastes. Most do not wish. Who needs the hassle?
Twenty years later, Thaler put those observations to work when devising recommendations for 401(k) plans. Most companies offered too many funds--and dangerous ones at that. They would place 15 or 20 funds (sometimes substantially more) in their lineups, several of which were specialized and volatile. The result was that some employees were too intimidated to start a plan, while others chased the highest and most-faddish of the performers. (Internet funds, anybody?)
For Thaler, there were too many options even before fund selection. Employees were asked to choose whether to enroll in a plan, or not. They were then asked at which rate they wished to contribute. Simple questions, to be sure--but nonetheless questions that prevented about 20% of workers from getting into a plan in the first place. So, why ask them? Why erect the barriers? Drop new employees into a 401(k) plan, in specified funds at a specified rate, and be done with the decisions. If those investors wish to make changes, they can. As with the video player, most will not.
Such has been the case. Automated-enrollment programs and their successors, auto-escalation features (which gradually increase the employee’s contribution rate), have been smash successes, helping 401(k) programs increase their reach and boost employee balances. In explaining its decision to award Thaler its 2017 prize, the Nobel committee mentioned, among other items, the practical effect that his work has had on 401(k) plans.
Think about nuts, win a Nobel.
Dumb In, Smart Out
Of course, there is much more to Thaler’s research than cashews and 401(k) accounts. But the anecdote reveals the essentials. It illustrates how Thaler, in his own words, studies “the dumb stuff.” Other economists can tackle the hard things. What model best explains stock behavior? How to price options? What effect does money supply on inflation? Thaler finds his material elsewhere.