Humans are Predictably Irrational:  The Influence of Nobel Laureate Richard Thaler and Behavioral Economics

Humans are Predictably Irrational: The Influence of Nobel Laureate Richard Thaler and Behavioral Economics

Suppose you are bitten by a spider and the chance of death from the bite is quite small (1 in 100,000), how much would you pay to receive the antidote?  Now suppose instead you are recruited to participate in a study in which this spider venom is being studied and the consent form says that you have a 1 in 100,000 chance of dying from the experiment.  How much would you want the researchers to pay you to participate?

Standard economic models assume that these are the same probabilities of death so you should rationally value them the same.  Richard Thaler, who was recently awarded the Nobel Prize in Economics, found that individuals expect to be paid many times more to risk their current health than to ensure their current health is maintained.  This “endowment effect” is a predictable cognitive bias that leads us to value more what we already have.  The related phenomena, loss aversion, is why I hold on to an energy investment fund that has lost money even though it is more rational to sell the fund and invest in something more promising.

Thaler’s discoveries in behavioral economics also include the concept of “mental accounting” in which we mentally earmark money for certain activities even though the money could be used more reasonably for other activities.  We treat money that is earned differently than money we chance upon.  High-end restaurants and shops in casinos do well because gambling winnings are more likely to be spent on an extravagance than saved in a rainy-day fund.

How is correcting the faulty assumption that people behave rationally so important that it deserves a Nobel Prize.  First, standard model economists are not blind to the irrationality of people around them, but to simplify economic models, they assume that people behave rationally and that deviations from rational economic decision-making are random.  Noble Prize winning behavioral economists like Thaler, and Kahneman and Shiller before him, did more than simply point out that people behave irrationally.  They developed principles and predictive models about how people behave irrationally that have important and relevant applications.

Among his books, Thaler is most well-known for “Nudge” which he co-authored with Cass Sustein.  We have known since Thorndike and Skinner that behavior is shaped by environmental contingencies, but Thaler and Sustein showed that by using cognitive biases to the public’s advantage, subtle, non-coercive changes to the environment can have substantial impacts. The application of Thaler’s work on automatic or opt-out savings has greatly increased retirement savings in defined contribution plans.

Thaler’s work also resulted in “Nudge Units”, first in the United Kingdom and then in the United States as the Social and Behavioral Sciences Team (SBST), that applied behavioral economics principles and empirical rigor to improve government operations and procedures.  Their last report lists a number of small changes in the implementation of government policy, along with rigorous evaluation of these changes, that had significant impacts on the lives of Americans.   Now reconstituted as the Office of Evaluation Sciences, this team continues to apply behavioral economics principles and evaluations to government operations and procedures.  Having served in the federal government for well over a decade, I can attest that there are many operations and policy implementations that could benefit from Thaler’s two directives: 1) if you want people to do something, make it easy, and 2) you can’t do evidence-based policy without evidence.

The work of Thaler and other behavioral economists have contributed greatly to advancing health research.  There are over 100 active NIH grants that leverage choice architecture and other behavioral economics principles to change behavior and improve health.  Among these active grants:

  • Abuse Liability of Reduced Nicotine Content Cigarettes within a Complex Tobacco Marketplace (R01DA042535)
  • Behavioral Economic Measures of Sensitivity to Social Reward in Children with ASD

(R21 MH108873)

  • A Trial of Expanded Choice Sets in Advance Directives for Hemodialysis Patients

(F32 DK107109)

  • Conditional Economic Incentives for Improving Adolescent Adherence to HIV Treatment (R21AI118393)
  • Nudging Primary Care Providers toward Guideline-Recommended Opioid Prescribing through Easier and More Convenient EHR Information Design (R21DA046085-01)
  • Behavioral Economic Approach to Reducing Maternal Smoking in Disadvantaged Women (R01HD078332)
  • Applying Behavioral Economics to Predict Alcohol Trajectories during the Transition to Adulthood (R01AA024930)
  • Leveraging the Electronic Health Record to Nudge Clinicians to Prescribe Evidence-Based Statin Medications to Reduce the Risk of Cardiovascular Disease (R21AG057380-01)

Details about these and other behavioral economics grant awards can be found on the NIH RePORTER.

Richard Thaler’s work, and the work of others in behavioral economics, has had far-reaching implications for many fields, including health research.  The Nobel Prize is a well-deserved acknowledgement of the far-reaching impact of his work on the science of human behavior.