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Marketplace Morning Report

How human behavior impacts the economy

Kai Ryssdal May 13, 2015
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The problem with many macroeconomic models is that they make predictions that don’t account for human behavior. And, as many of us may know, human beings are not always logical.

“In the 1940s, economics started getting highly mathematical,” says Richard H. Thaler, founding father of behavioral economics and a professor at the University of Chicago Booth School of Business. “It was basically because economists weren’t smart enough to write down models of real behavior, that they started writing down models of highly rational behavior – and they kind of forgot about humans.”

In his new book, “Misbehaving: The Making of Behavioral Economics,” Thaler describes his time trying to convince economists of this. He recalls his time as a grad student: “My thesis topic was ‘The value of a human life.’ I asked people a question: ‘Suppose you had some risk, a one in a thousand risk of dying, how much would you pay to eliminate it?’ People would give one-answers and say ‘$5,000.’

And then I’d say, ‘How much would you have to be paid to take an extra one in a thousand risk of death?’ And they’d say, ‘Well, I wouldn’t do that at all’ or ‘I would demand a million dollars!’ Well, economic theory says the answers to those two questions should be basically the same, and they were like way different. And I said, ‘Oh that’s interesting.’ “

Thaler’s behavioral research was at first dismissed as irrelevant. Many mainstream economists argued that professionals responsible for making big economic and financial decisions would think rationally. 

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