Richard Thaler: How many of you had an economics course sometime during your life?
Emmanuel Roman: Most people.
Richard Thaler: Almost everybody. So, you remember the way that courses taught is there are these economic agents in Latin it's homo economicus. And these economic agents are really smart. They have no emotions and they don't care about anybody else. And the idea the humans versus ‘econs’ the idea is that, I call these people ‘econs’ – the people you only read about in economics textbooks and my claim is that they don't exist.
When I was lucky enough to win the Nobel Prize two years ago, there's a toast I had to give at the banquet and my toast was - my great discovery was discovering human life in a place where it was thought not to exist, which was the economy.
And that's really the essential insight of behavioral economics, which is: We don't have these robots. We don't have a world of bots. They may be around the Internet more than we suspected but they're not consumers and investors and traders, and even CEOs are human, which means they're imperfect and emotional and expectations can be biased and influenced by all kinds of things and that makes the world way more interesting.
Emmanuel Roman: They gave the gave yesterday a Nobel Prize to three great economist, and as we were talking about – in a way, they do behavioral economy.
Richard Thaler: Oh, absolutely. So, if you weren't clinging to this news economists this is you know the most interesting day of the year.
It was given to three economists and together they are responsible along with hundreds of others, but they're the leaders, in creating a style of research of doing randomized controlled trials in poor countries.
Emmanuel Roman: You had that in medicine, right?
Richard Thaler: Yeah so, we've been doing that for drugs for many years. There's no way to know whether a medicine works or doesn't unless there's a control group that gets a placebo. And the reason for that is, most of the time – no matter what's wrong with you – you get better. And that's why the species existed before we had pharmaceutical companies.
Let me describe one of the experiments. The question was why didn't peasant farmers in India use enough fertilizer on their farms. Now think about it. In the economic analysis of this, well, we say people are rational farmers or business persons and they will use the optimal amount of fertilizer. That is the theory of the firm, that you learned in school, marginal cost equals marginal revenue and everybody produces in the most efficient way possible. So, it turns out most farmers were not using nearly enough fertilizer and they could almost double their income by spending a couple dollars on fertilizer and they weren't doing it. And they tried various ways to get them to do it. Lowering the price and so forth and so on. The thing that worked used my favorite behavioral tool which is: ‘make it easy’.
And the best time to intervene was right after the harvest. Which is because that's when they have money. And the intervention was free delivery. Which by the way has made Jeff Bezos a very rich man. So, they offered fertilizer prime, and free livery and that – I don't remember the exact results – but basically, it increased income by about 50 percent. So, you know again the economic theory says this will have no effect. It's a trivial….
Emmanuel Roman: [?]
Richard Thaler: And because they're already doing everything perfectly. And, anyway, it's a beautiful little experiment. And this is how ‘one experiment at a time’ we're starting to learn some lessons about how we can lift people out of poverty.
Recorded 15 October 2019
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