Behavioral Economics #4: Meet The Troublemakers

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Being part of change is incredibly risky.

Change upsets the status quo. Change is uncertain. Change is uncomfortable, both for those making the change and those on the receiving end of it.

Then there’s another matter. Namely, how will you know if this new, transformational movement will actually be better than the status quo? If it isn’t, then the joke is on you and your career, not to mention that your credibility as a professional will take a serious hit. If the new movement fails, you’ll have to brace yourself for some humble pie and a barrage of criticism.

With that said, it’s clear that those at the forefront of the behavioral economics movement were taking a huge risk by championing this new field and challenging the status quo. This is especially true given that economists can be an intimidating bunch.

So who were the brave intellectual warriors that spearheaded the rise of behavioral economics?

Time to meet the troublemakers.

The Troublemakers

While this is not an exhaustive list, what follows includes the most important individuals and organizations that led the charge for behavioral economics in its early stages. You can also click their names to go to their respective bio pages.

Richard Thaler

The genius and founding father of behavioral economics. Without him, none of this would ever have happened. He risked career suicide by going so strongly against the grain and championing behavioral economics so vigorously, and I am forever grateful that he made this brave choice. As a reward for his efforts, he received the 2017 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, also known as the Nobel Prize in Economics.

Winning this prize and being recognized on the global stage meant that it was finally official: behavioral economics was real.

Daniel Kahneman & Amos Tversky

You can never mention one without mentioning the other. As Michael Lewis described it in his phenomenal book The Undoing Project: A Friendship That Changed Our Minds in which he chronicled the relationship between the two Israeli geniuses, Kahneman and Tversky had a profound intellectual bond that bordered on love. They had an incredible working relationship that showed us that love for your fellow man is not only developed in flashy romantic ways, but also through deep, mental connections.

Kahneman and Tversky had the most strikingly different personalities. Kahneman was the mildly neurotic, low-confidence, and not very social type of person. He tended to second-guess himself a lot and, based on how Lewis described him in The Undoing Project, seemed to be suffering from a dose of imposter syndrome. Tversky, on the other hand, was a far more social and confident character who had no problems making conversation and seemed to enjoy being direct when talking to people.

The two were so close and so egalitarian of each other’s contributions to the work they did together that they couldn’t decide whose name should go first on the research papers they wrote. To decide, they flipped a coin.

Arguably their most important contribution to behavioral economics came from their groundbreaking 1979 research paper "Prospect Theory: An Analysis of Decision under Risk." It cannot be understated how important the work of Kahneman and Tversky were to Richard Thaler, who spent much time working with them.

Tragically, Tversky died from cancer before he had the opportunity to share the honor of being the first two psychologists to receive the Nobel Prize in Economics with Kahneman.

Kahneman had to receive the prize alone in 2002, even though he would have certainly shared the prize with his beloved friend had he not passed away in 1996. The Nobel Prize is, unfortunately, not awarded posthumously.

George Loewenstein

Co-founder of behavioral economics and, interestingly, the great-grandson of Sigmund Freud. Worked closely with Thaler on various occasions and was also a member of the very first Behavioral Economics Roundtable. A brilliant psychologist and economist, he also founded the field of neuroeconomics and was one of the early proponents of a new approach to public policy called ‘asymmetric’ or ‘libertarian’ paternalism (note: Thaler always described the application of behavioral economics to public policy as libertarian paternalism).

Eric Wanner

Former vice president and program officer at the Alfred P. Sloan Foundation, Wanner became President of the Russell Sage Foundation in 1986 and is, at the time of writing, still in that position. Crucially, he was one of the first non-behavioral economists to realize the importance of funding research in the field. When he became President of the Russell Sage Foundation, he convinced the organization’s board of directors to financially support behavioral economics.

It’s no surprise then that Richard Thaler describer Wanner as “behavioral economics’ founding funder.”

The Russell Sage Foundation

As alluded to above, money is a pretty important thing in life. If behavioral economics was going to truly become something, it was, naturally, going to need some serious financial resources.

This financial backing came from the Russell Sage Foundation, the first institution to give the behavioral economics movement real financial support. It did this through an annual $100,000 grant for the Behavioral Economics Roundtable.

The Behavioral Economics Roundtable

I talked about the Roundtable in Part 3, but given how important they were to behavioral economics, I thought that it wouldn’t hurt repeating them.

In 1992, the Russell Sage Foundation brought together a group of researchers, called them The Behavioral Economics Roundtable, gave them a budget of $100,000 per year, and tasked them with one simple but extremely important objective: fostering growth in behavioral economics.

The members of the group were George Akerlof, Alan Blinder, Colin Camerer, Jon Elster, Daniel Kahneman, George Loewenstein, Thomas Schelling, Robert Shiller, Amos Tversky, and Richard Thaler.

The Roundtable decided to start by cultivating the next generation of (young) behavioral economists. The team organized two-week, intensive summer training programs for graduate students (held in the summer to avoid conflict with university courses) and called these trainings the Russell Sage Foundation Summer Institutes in Behavioral Economics, or the Russell Sage Summer Camps for short.

On page 183 of his book, Thaler states that the team wanted to “increase the likelihood that some of the best young graduate students in the world would seriously consider the idea of becoming behavioral economists” and to “provide them with a network of like-minded economists they could talk to.”

Supporting Cast

There were also individuals who, while not on the front line of the battle, were still very important contributors to behavioral economics in the early days of the movement. While I discussed most of them in Part 3 of the series, there are still a few more that deserve a mention:

Robin Hogarth & Melvin Reder

Organized the 1985 Chicago conference which, as Thaler describes it in his book Misbehaving: The Making of Behavioral Economics, was where “behavioral economics got its first major public hearing.” As I stated in Part 3, this was an incredibly important event in the development of behavioral economics.

Cass Sunstein

Co-author of the phenomenal bestselling book Nudge: Improving Decisions about Health, Wealth, and Happiness with Richard Thaler. This was the first book on (the real-world applications of) behavioral economics and Thaler’s very first book as well.

Ernst Fehr

Behavioral economist, neuroeconomist, and a central figure in the behavioral economics movement in Europe. Thaler invited Fehr to participate in the first Russell Sage Summer Camps in 1994. Today he is a Professor of Microeconomics and Experimental Economic Research, as well as the vice chairman of the Department of Economics at the University of Zürich, Switzerland.

Matthew Rabin

Also invited by Thaler to participate in the first Russell Sage Summer Camps in 1994. Rabin published important research that, as Thaler describes it, “was the first serious attempt to develop a theory that could explain the apparently contradictory behavior observed in situations like the Ultimatum and Dictator Games.

Today, Rabin is the Pershing Square Professor of Behavioral Economics in the Harvard Economics Department and Harvard Business School. His research focuses primarily on incorporating more realistic psychological assumptions into applicable economic theory.

Colin Camerer & Robert Shiller

In his book Misbehaving, Thaler stated that “in the late 1980s, there were really just three people besides me who thought of themselves as behavioral economists.” These three were George Loewenstein, Colin Camerer, and Robert Shiller.

Shiller’s expertise was behavioral finance, which is the study of why market participants make irrational, systematic errors that contradict assumptions of how rational market participants should act (similar to the Humans vs. Econs discussion in Part 1).

Colin Camerer, as Thaler describes him,

more or less invented the field of behavioral game theory, the study of how people actually play games as opposed to standard game theory, which studies how Econs would play games if they knew that everyone else playing was also an Econ. More recently, he has been at the forefront of neuro-economics [with Loewenstein], which uses techniques such as brain imaging to learn more about how people make decisions.
— From Page 176-177 of "Misbehaving: The Making of Behavioral Economics"

Unsurprisingly, Camerer is also a winner of the famous MacArthur Foundation “genius grant.”

Note: When Thaler says “games” he’s talking about game theory, not about video games.

Band Camp

As I mentioned above and in the previous post, the first edition of the Russell Summer Camps had quite the star-studded alumni group. To save you a click, I’ll repeat those names here:

David Laibson

The Robert I. Goldman Professor of Economics and a Faculty Dean of Lowell House. Among many other roles, he also leads Harvard Universityʼs Foundations of Human Behavior Initiative.

Sendhil Mullainathan

Professor of Computation and Behavioral Science at the University of Chicago Booth School of Business, winner of the famous MacArthur Foundation “genius grant”, co-founder of the first behavioral economics nonprofit think tank called ideas42 (fun fact: I actually applied for a job there a few years ago. Unsurprisingly, I didn’t get it), and co-author of the book Scarcity: Why Having Too Little Means So Much.

Terrance Odean

The Rudd Family Foundation Professor of Finance at Berkeley Haas, a highly-respected behavioral finance scholar, and the person who, as Thaler states, “essentially invented the field of individual investor behavior.”

Chip Heath

Thrive Foundation for Youth Professor of Organizational Behavior in the Stanford Graduate School of Business and co-author of the 2007 best-selling book Made to Stick: Why Some Ideas Survive and Others Die.

Linda Babcock

James M. Walton Professor of Economics and former Acting Dean at Carnegie Mellon University's H. John Heinz III School of Public Policy and Management. She is the founder and faculty director of the Program for Research and Outreach on Gender Equity in Society (PROGRESS) and, best of all, current member of the Russell Sage Foundation’s Behavioral Economics Roundtable.

Christine Jolls

The Gordon Bradford Tweedy Professor at Yale Law School and Director of the Law and Economics Program at the National Bureau of Economic Research (NBER). Also served as a law clerk at the Supreme Court of the United States.

Next up: Seeing the world in nudges

In the next part, arguably my favorite one, we’ll look at a few examples of fascinating and fun real-world applications of behavioral economics. From organ donation to energy-saving tactics and increasing tax receipts, this is where we’ll see the truly transformational power of this exciting new field of economics.

See you, Space Cowboy.