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June 03, 2021

Richard Thaler: 3 crucial money saving and life wisdoms from the Economic Nobel Prize winner

Publishing key research in the early 1980s, Thaler and his ideas at first seemed radical - so much so that much of the economics faculty at the University of Chicago reportedly tried to block his appointment. Eventually, Thaler’s ideas helped give rise to the modern field of behavioral economics, which combines elements of economics and psychology in an attempt to figure out why people make the decisions they make.

1. You tend to think your own stuff is more valuable than it is

Another one of the ideas Thaler helped popularize was something called the "endowment effect," which is another way of saying that people tend to overvalue their own possessions, all other elements being equal.

In one often-cited experiment, Thaler took a group of economics students and gave half of them college coffee mugs and instructed them to assign a value to the mugs. Those who had mugs perceived the mugs as being more valuable than those who did not.

The reason for this may have to do with something called loss aversion, which holds that people tend to overestimate the pain of losing something and underestimate the pleasure of acquiring it. In one of his papers, the endowment effect is used to explain why so few people who have their pictures developed request refunds for pictures that turn out poorly.

2. Taking a long view pays off

One of the main reasons the committee decided to give the Nobel award to Thaler was his work on the topic of self-control. Everyone knows they’re supposed to save for retirement, but comparatively few people actually save enough - and the reason is because people have a hard time balancing long-term preparations with everyday demands and temptations.

Thaler’s framework for analyzing this tension, called the planner-doer model, is widely used by psychologists and neuroscientists. This tension explains why so many people still opt to have that morning coffee, despite the fact that a lifetime of coffee savings could save you a solid chunk of change over time.

That simple finding paved the way for one of the most surefire ways to save more money: Take five minutes right now and automate your account deposits.

3. It’s smart to pay attention to the invisible design choices steering decision-making

Automatically enrolling people into retirement accounts is an example of something Thaler and one of his research partners, Cass Sunstein, call a "nudge," a slight tweak to the process which leads to substantially better outcomes. Public policy makers have increasingly looked for other ways to "nudge" individuals in the direction of better long-term choices.

One of the best examples? Thaler’s arguments for automatic enrollment are often credited with a nationwide push to automatically enroll children for free school-lunch benefits. A similar plan that’s underway in New York City public schools is expected to expand access to an additional 200,000 children.

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