Congratulations to Richard Thaler
By Scott Sumner
As a University of Chicago alum, it’s always nice to see the UC pick up another Nobel Prize in economics.
Economists are often accused of engaging in empty theorizing, but Thaler has developed useful ideas, such as methods by which the public can be “nudged” into boosting their saving rate. Some of these have been successfully implemented.
Perhaps unknown to many, Thaler’s most heavily cited piece is on whether the stock market overreacts. He says yes this is possible for psychological reasons, and this article also uncovered some of the key evidence in favor of the now-vanquished “January effect” in stock returns, namely that for a while the market did very very well in the month of January. (Once discovered the effect went away.)
Went away? Well that’s one way of putting it. Imagine a study in psychology, perhaps one of those where they prime people with shocking pictures, and see how it affects their behavior. Then imagine a number of follow up studies that fail to replicate the original study. (This inability to replicate happens all the time in the social sciences.) Would we say the effect “went away”? So why do we show such respect to the study of anomalies in finance?
Behavioral economics is not my area, so perhaps someone can help me with the following remark by Tyler:
Very lately Thaler on Twitter has been making some critical remarks about price gouging, suggesting we also must take into account what customers perceive as fair.
I had thought that the point of behavioral finance was to try to identify areas where the publics’ intuition is in some sense “wrong” and design public policies to nudge them in the right direction. In that case, shouldn’t we be encouraging price gouging, not discouraging it? Especially with public policy. Perhaps President Trump could “name and shame” companies that run out of essential supplies because of an unwillingness to price gouge. (Yes, not likely, I’m just trying to show the logical implications of behavioral economics.)
Note that this is a separate point from whether firms themselves ought to take into account public perceptions—I agree that there are cases where firms may decide it’s wise to avoid price gouging for reasons of public relations. But that’s different from endorsing laws that restrict price gouging. Don Boudreaux and David Henderson recently made related criticisms.