Richard H.Thaler, who won the 2017 Nobel Prize in Economics for his contribution to the field of behavioural economics, is a proponent of the idea that humans do not act entirely rationally. In an illuminating lecture (above) at the Carnegie Mellon University in Pittsburgh, Pennsylvania, the economist incorporates insights from other social sciences such as psychology to create a better understanding of the standard economic model. The video takes viewers through several stages of the idea:

  • Thaler begins by stringing together what early economists like Herbert Simon, Adam Smith, Keynes and Vilfredo Pareto had to say about irrational human behavior and its effect on economic models, after which he defines the core assumptions of economics (optimisation, self-interest, consumer sovereignty and unbiased beliefs).  
  • Thaler then dives into the question of whether these assumptions can be applied to human beings. He talks about how behavioural economics is just borrowing good psychology rather than inventing bad psychology. “All of economics will be as behavioural as it should be.”  
  • He brings up the concept of “explainawaytions” (a term coined by economist Matthew Rabin) to tell the story of an expert billiards player who plays billiards “as if” he knew math and physics.  
  • He relates fascinating (and amusing) examples of irrational human behaviour, including a graph showing the changes over time in the share price of a fund with the abbreviation CUBA (though the fund has absolutely no connection with the Caribbean country its share price jumped to a 70% premium when President Obama announced his intention to relax the United States’s diplomatic relations with Cuba).
  • Thaler illustrates how much “default settings matter.” On his flight to Pittsburgh to deliver the lecture he noticed that a majority of the passengers were watching CNBC – it was the channel that all the in-flight TVs had been set to by default.