Richard Thaler
Illustrations by Joel Holland

Class, Behave!

When Richard Thaler brought the debate about behavioral economics to Chicago Booth, he entered a classroom that extends to Stockholm and beyond.

In 2017, Chicago Booth professor Richard Thaler won the Nobel Prize in Economic Sciences. Thaler’s students describe him as “a luminary,” “a guru”—someone who changed their lives and set their careers on a trajectory to success.

So it might be surprising to hear that those superlatives contrast amusingly with the way Thaler’s close friends and admirers—and even Thaler himself—have described the newly minted Nobel laureate:

Richard Thaler

“We didn’t expect much of him,” said Sherwin Rosen, AM ’62, PhD ’66 (Economics), his thesis advisor at the University of Rochester.

Daniel Kahneman, the 2002 Nobel laureate in Economic Sciences and one of Thaler’s closest friends, described Thaler as “lazy.”

Early on in Thaler’s career, his fellow Booth professor and future golf buddy Eugene Fama once quipped, “His work is interesting, but there’s nothing there.”

Thaler’s own self-assessment is hardly more glowing. He considers himself “at best, an average economist.” How did an “average economist” change the field of economics, gain a worldwide reputation, and influence public and corporate policies for millions of people—and win the Nobel Prize?

It turns out that Thaler’s ability to spot anomalies, tell stories, and share credit for his successes have made him not only a great researcher, but also a great teacher.

“One of the nicest things that has happened since the Nobel,” Thaler said, “is hearing from lots of students that I hadn’t stayed in touch with saying they still think about that class and they remember this story or that story many years later. When I first figured out the power of storytelling, I would tell my students that my plan was not to maximize what they knew at the end of the course but what they would remember five years later. Now I know that some of them remember it 40 years later.”

Looking for His Cello

Thaler decided to become an academic, he says, because he is “a really lousy subordinate.” Academia seemed the only career where no one could tell him what to do. He had no grand plan; he just wanted to get tenure. Two years into his career as an economics professor—teaching the MBA version of Econ 101 at the University of Rochester and frankly not having much fun—he came upon the work of Daniel Kahneman and the late Amos Tversky. It opened his eyes to the reason behind so much of what he observed. Economics, he was finding, was “a bit boring.” On the other hand, people watching was interesting. He suspected that the gap between psychology—what the two professors were studying—and economics was largely unexplored, with lots of low-hanging fruit.

In a 2003 convocation speech at the University of Chicago, Thaler likened the moment to a story about world-renowned cellist Yo-Yo Ma. Ma began his musical studies as a toddler on the violin, on which he describes himself as only average, but when someone handed him a cello, he found his calling. In spotting the connection between psychology and economics, Thaler said he “found his cello.”

In 1977, he went to Stanford to spend a year with his idols, Kahneman and Tversky, who were there visiting from Israel. They helped him learn psychology, he helped them learn economics, and they became both friends and collaborators. At the end of that year, Thaler jumped to the SC Johnson College of Business at Cornell University. He created an elective course called Behavioral Decisions Theory. It was “a little off the wall,” with much material possibly “borrowed” from a class he had taken from Tversky, he recalled. The class was not very well attended.

“I had to figure out how to increase enrollment in the class,” he said. “I changed the name to Managerial Decision Making and enrollment doubled.” Thaler asked his students how many chose the course based on the name. “No one said yes,” he remembered. “I said, ‘Half of you are wrong.’”

Thaler, the professor, had arrived.

I want students to have to think about it, not just memorize what was said.

Richard Thaler

The Power of Storytelling

Memories of Thaler’s teaching style have one common thread for all of his former students: laughter. They can’t describe a Thaler class without a smile. “He meanders up to the podium,” said Linnea Gandhi, MBA ’14, who has known Thaler as a student, a teaching assistant, and now co-professor as adjunct assistant professor of behavioral science at Booth. “Then he tells stories about foibles and fumbles, not just in companies but in his own life.” In most students’ recollections, this is done at a slight lean, against the podium, against the transparency machine in the old days, against whatever’s handy.

Thaler’s stories have become part of his mythology. A select few made it into his Nobel lecture. The story of the bowl of cashews, of the blizzard that kept him and a colleague from driving 75 miles to a basketball game, of his former professor’s wine collection: seemingly random, always entertaining, these slice-of-life stories led to research projects, which led to his theories on self-control, on mental accounting, and on the endowment effect, loss aversion, and status quo bias—all of that in the first few years of his career.

His teaching style is so avuncular and accessible, his body language so relaxed, that students often underestimate the content. They may sign up because of his reputation, or because of a shared love of sports, or—of late—because he’s recently been in an actual first-run movie with actual movie stars (The Big Short, winner of the Academy Award for Best Adapted Screenplay in 2016). On its face, the substance of his syllabus may seem easy. When students try to apply the theories, Gandhi said, “that’s when they realize how difficult it is.”

 Thaler tells stories “because that’s what people remember.” His class includes what he calls “the little magic show,” part of which relies “on students having forgotten things they learned in statistics class” during a previous semester. “Nobody remembers some formula,” he said. “But they remember stories.”

Thaler’s storytelling style in the classroom has made an indelible impact on his students. If you were to ask the thousands of Booth graduates who have taken his courses over the decades which Booth course they remember the most, “a tremendous number would cite his class,” said Raife Giovinazzo, MBA ’03, PhD ’08. “He built it to be memorable—and therefore useful.”

Richard Thaler

Sports stories permeate Thaler’s classes. He has even managed to write an academic paper about the NFL draft. He is a sports fan, a golfer, and agnostic in his preference for football over baseball over basketball. As a behavioral economist, however, “my justification is that we get to watch the teams’ decisions in a way that we don’t in most of business,” he said. When Amazon was deciding whether to buy Whole Foods, for instance, the general public was not privy to the conversation. “We see that they did it and we see their reasons, but we don’t see the five things they thought about and didn’t do,” Thaler said. “If a firm is hiring a new CEO, we have no idea who they interviewed, how they made the decision.”

On the other hand, sports fans can see the decision-making process in play every second of a sporting event. “When a basketball player takes a two-point versus a three-point shot, we see that decision play out,” Thaler said. “There’s now data on every action by every player in every game.” There is no similar dataset on decision-making within firms.

No Right Answers

As a young professor teaching more basic economics courses, and giving exams that were more about data, Thaler found that his students disliked being graded on a curve. They balked at scoring only 65 when the average score was 72—it mattered little that their actual score would earn them a B.

Richard Thaler

Thaler didn’t want to make the exams any easier. But as a young professor with an eye on tenure, he wanted to keep his job. He kept the exam just as hard, with one exception: the number of available points rose to 137. When Thaler graded the test, the average score rose as well, to 96. Students might still get a B, but they felt better. Some of them were positively ecstatic that they scored “higher than 100.”

Their joy, of course, makes no rational sense. The experience added to Thaler’s mounting list of “supposedly irrelevant factors,” or SIFs. SIFs form the basis of much of his thinking on why people behave in irrational ways, and why their irrationality is predictable.

He once ran into a student who was studying for the final exam in his class and said he was busy outlining the articles they had read, a thought that appalled Thaler. “I want them to have to think about it,” he said, “not just memorize what was said.” So he started using a new type of exam. He would ask students to submit potential exam questions and then would circulate about 75 of those questions, saying the exam would be composed of (slightly edited) versions of these. The rule in generating questions was that they could not have a simple “correct answer” but rather force the students to ponder the material they had learned and then apply it to some novel situation.

 “It’s not the most precise way of measuring how much they’ve learned,” he said. “But it’s the best way I have found to maximize what they learn when studying for the exam.”

“It’s different than a traditional exam,” said Drew Dickson, MBA ’99. “On most exams, you go point to point, show your work, and here’s your grade. Thaler’s tests probe you, and show what paths you might go down to solve the problem. There might be more than one answer. You’re not done with the test when you finish the test. You have to apply your ability to think laterally. You learn how to question yourself.”

One of Thaler’s former teaching assistants, Dean Karlan, MBA ’97, MPP ’97, expressed relief that his TA stint predated the latest, nontraditional iteration of Thaler exams. “It sounds like a nightmare to grade,” said Karlan, now professor of economics and finance at Northwestern University and founder of Innovations for Poverty Action (IPA).

Thaler once compiled a list of the top 10 reasons not to take his class. Imprecise and subjective grading was on the list. “If you want exams with right or wrong answers,” he said, “take accounting.”

The people who helped him—he gives it back. . . . It makes for lifelong fans.

Linnea Gandhi

Laziness as a Work Habit

Thaler’s nonchalance in the classroom downplays his brilliance and showcases his supposed laziness, a trait that he attributes to himself. There is no way he could have achieved everything he has if it were true, however. In fact, he “works his butt off,” according to Gandhi, who helped Thaler prepare both the final draft of Misbehaving: The Making of Behavioral Economics—his most recent book—and his Nobel lecture. With a caveat, Gandhi added: Thaler works only on things that interest Thaler. “When he gets an idea and begins to think about it,” she said, “it works its way into every conversation, every class, every speech.”

Richard Thaler

Cade Massey, MBA ’03, PhD ’03, worked with Thaler on research into the NFL draft over the course of 14 years. They began in 1999, published “The Loser’s Curse: Decision Making and Market Efficiency in the National Football League Draft” in 2005, and updated their findings in 2012. Now a practice professor in the operations, information, and decisions department at the Wharton School, Massey is working with an NFL team on what has come to be known as people analytics.

“He’s not lazy,” Massey said. “He just wants to work on things that amuse him. Then he’s not lazy at all. He doesn’t like to do things he doesn’t want to do.”

Nudge: Improving Decisions about Health, Wealth, and Happiness, Thaler’s best-known book and a best seller, originally appeared in 2008. One chapter, about the Swedish social security system, evolved from a 2004 paper he wrote with a Swedish doctoral candidate, Henrik Cronqvist, PhD ’05. When a scandal involving the system arose in 2017, Thaler contacted Cronqvist, now chair of the department of finance at the University of Miami. “He said, ‘Let’s put the band back together,’” Cronqvist recalled. Last December, while in Stockholm to accept his Nobel, Thaler addressed the Swedish Parliament in anticipation of a paper published the following month called “When Nudges Are Forever: Inertia in the Swedish Premium Pension Plan.”

Given the size of the dataset—every pension choice made by every Swede since the system’s inception—the idea is likely to continue kicking around in Thaler’s head, cropping up in every class, every conversation, every speech. As in the work he did with Massey on the NFL draft, he will stick with something for years until he resolves it in his own mind. The man leaning casually against the lectern is his own toughest critic and does not grade himself on any curve.

“He’s amazingly productive,” said Karlan of Thaler’s work habits. “But with a strong preference for hanging out.”

The Chicago Approach

It is hard to imagine two more different individuals, two more different teachers, or two more different economists than Thaler, Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics, and Eugene Fama, Robert R. McCormick Distinguished Service Professor of Finance. Thaler’s theories—once referred to as wackonomics—took decades to be accepted by the economics establishment. Even post-Nobel, there is still some skepticism from the quant side of the house. Fama, the father of much of the efficient-market hypothesis, is known for exactitude, and for not suffering fools well, if at all. Professor Fama does not lean nonchalantly on the podium and tell stories. On his exams, there is most definitely a right answer and a wrong one.

And while it was Fama who said that there wasn’t much to Thaler’s work, unlike his colleague Merton Miller, Fama did not oppose Thaler’s coming to Chicago. When Thaler did arrive in 1995, Miller was asked why he had not blocked the appointment. He replied: “Each generation has to make its own mistakes.” Quite a welcome!

The seemingly unlikely relationship between Thaler and Fama—good friends and golf partners, and yet diametrically opposed in so many ways—encapsulates the appeal of Booth to so many students. It’s not about the disagreement; it’s about the ideas and the ability to debate those ideas without rancor or ill regard.

“Miller and Fama gave me the framework I start with to this day,” said Dickson, founder and CIO of Albert Bridge Capital in London. “But Dick Thaler gave me the red pill. He’s been showing me how deep the rabbit hole is ever since.”

Dickson mentions how Thaler likens the debate between behavioral economists and efficient-market economists to a face-off between Homer Simpson and Mr. Spock from Star Trek. “When you look at markets, on the other side of the table from Mr. Spock sits Homer Simpson, a human being. In my business, any Spock can see when a stock is cheap or expensive. But what can I find that proves that the market is acting like Homer? The value-added is the application of these tenets of behavioral finance.”

When Giovinazzo arranged his PhD committee, he sought out the best group, regardless of any supposed differences. Fama and Thaler sat on his committee. “Both believe in looking at the facts,” said Giovinazzo, who passed up a career as a professor and has become a partner at Fuller & Thaler Asset Management in San Mateo, California. “There wasn’t even any controversy on how they approached the committee. They might disagree on how far you can extend the facts, but if the analysis is done in a sensible way, they will be in sync on it.”

Thaler provokes debate with and among his students, both in class and out. When Executive MBA students take his class at the same time they’re taking Microeconomics, “he loves to get them arguing the micro side of things and then help them see what micro is missing,” Gandhi said. “Booth does a better job of training for ideas than any other business school,” added Giovinazzo. Thaler’s “little magic show” is a prime example.

As part of that show, Thaler presents a bunch of questions people typically get wrong, predicts the incorrect answers most students will give, and then reveals the right answer. “They’re always different,” Thaler said, “and my predictions of their answers are almost always right. The point is to show them they are not as smart as they think they are. I can predict the mistakes they are going to make.” Far from any sort of professorial one-upmanship, his magic show starts an inquiry that forms the basis of behavioral economics and of his unique teaching style.

When Thaler first came to Chicago, he made Fama’s course a prerequisite for his PhD course in Behavioral Finance. “You have to know the standard theory before you can criticize it,” Thaler said. “You can argue the empirical validity of the efficient-market hypothesis, but there would have been no behavioral finance without it. It’s the benchmark to which we were comparing things.”

The Chicago Approach, both men agree, is to have fierce arguments in workshops but never make them personal, to debate principles and ideas rather than personalities and egos. It is not just intellectually stimulating and distinctly different from any other business school; it shows a generosity of intellect uncommon in any workplace.

“He’s fearless,” Karlan said. “I came to this after he’d already cut against the grain. That’s what got him here. He was like a dog with a bone and wouldn’t let it go until others said, ‘Maybe he’s onto something.’”

As attendees to Thaler’s Nobel lecture (viewable on NobelPrize.org) found their seats in a large auditorium, they were shown a slideshow that was running until the lecture began. Fifty slides recognized more than 100 people who have helped him in his work. The slides were his idea and he was very insistent on their inclusion, according to Gandhi.

“He did not climb the ladder,” Gandhi said. “He didn’t step on people. He followed stuff that was odd and weird, and he didn’t care what others thought. The people who helped him—he gives it back. It is the coolest, most surprising side to him. And it makes for lifelong fans.”

—By Rebecca Rolfes