Morningstar Magazine - December 2017/January 2018 - 59

on fictional characters. Think of Spock in the old
Star Trek series. He's an econ.
Ritholtz: Or at least tries to be.

Thaler: Pretty much succeeds.
Ritholtz: Pon farr?1 If you really want to get wonky....

Thaler: No, no, no, I don't want to go there. But
he's close-closer than you or me-versus,
say, Homer Simpson. If you were building a model
of economic agents, what would be better-
a model of Spock or a model of Homer Simpson?
Ritholtz: Certainly, Spock would be desirable, but
Homer Simpson is the reality.

Thaler: Yes. So, economics is supposed to be
about reality. Economics is not a theory of experts.
That's a mistake that lots of people make-
that it's built as if everyone knew as much about
a subject as the economists studying it.
Ritholtz: So, the second question: How is a social

science, such as economics, built on such a fundamentally flawed assumption?

Thaler: It didn't used to be. I would say
economics through World War II was behavioral
economics. Starting with Adam Smith-especially
The Theory of Moral Sentiments, the book
before The Wealth of Nations-through Keynes,
economics was behavioral.

Then, there was a period of the great mathematization of economics that started with people
like Paul Samuelson. If you're going to write down
mathematical models, the easiest models
to write are the ones where people are rational,
because you just write max and solve, and
if you can take a derivative and set it equal to zero,
then you're an economic theorist.
If people are doing something more complicated
than that, like buying a stock or a fund because
of its ticker symbol, good luck writing that down
in a mathematical model.

Economics is not a theory of experts. That's
a mistake that lots of people make-that it's
built as if everyone knew as much about a subject
as the economists studying it.
Richard Thaler

Ritholtz: Yet the history shows that more
memorable ticker names outperform random letters
and random names.

Thaler: Good taste in friends?

Thaler: Right. So, behavioral economics is messy.
Traditional economics is precisely wrong.

Ritholtz: But you don't always get to choose
who your advisor is going to be or the person who
is reviewing your doctoral thesis.

Nobel Mentors

Thaler: No, but the people closest to
me, Daniel Kahneman and Amos Tversky,2
I stalked them.

Ritholtz: Let's talk a little bit about your career in
academia. You have had a number of mentors who all
turned out to be Nobel laureates. How did that happen?

Thaler: They were at Hebrew University and were
scheduled to spend a year at Stanford. This

Ritholtz: Really?

1 Vulcan mating ritual.
2 Kahneman received the Nobel Memorial Prize in Economic Sciences in 2002, six years after Tversky died, for his and Tversky's work on prospect theory. Kahneman and Tversky's paper
"Prospect Theory: An Analysis of Decision Under Risk" (Econometrica, Vol. 47, No. 2, pp. 263-291, March 1979) is often regarded as the groundbreaking work of behavioral economics.
But Kahneman credits Thaler. In his Nobel biographical, he wrote, "[T]he founding text of behavioral economics was the first article in which Thaler (1980) presented a series of vignettes that
challenged fundamental tenets of consumer theory." He is referring to Thaler's paper "Toward a Positive Theory of Consumer Choice" (Journal of Economic Behavior & Organization, Vol. 1,
No. 1, pp. 36-90, March 1980).

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