The New York Times Magazine
February 11, 2001
Exuberance Is Rational
Or at least human
Richard Thaler has led a revolution in the study of economics by
understanding the strange ways people behave with their money.
By Roger Lowenstein
It is possible that Richard Thaler changed his mind about economic theory and went on to challenge
what had become a hopelessly dry and out-of-touch discipline because, one day, when a few of his
supposedly rational colleagues were over at his house, he noticed that they were unable to stop gorging
themselves on cashew nuts he'd put out. Then again, maybe it was because a friend admitted to Thaler
that, although Thaler he mowed his own lawn to save $10, he would never agree to cut the lawn next
door for $10, or even more. But the moment that sticks in Thaler’s mind occurred back in the 1970s
when he and another friend, a computer maven named Jeff Lasky, decided to skip a basketball game
because of a swirling snowstorm.
"But if we had bought the tickets already, we’d go.” Lasky noted.
“True – and interesting,” Thaler replied.
Thaler began to make note of these episodes – anomalies, he called them – and to chalk them up on his
blackboard at the University of Rochester, where he was a young, unheralded, and untenured assistant
professor. Each of these stories was at odds with neoclassical economics as it is taught in graduate
schools. Indeed, each was a tiny subversion of the prevailing orthodoxy. According to accepted
economic theory, for instance, a person is always better off with more than with fewer choices. So why
had Thaler’s colleagues roundly thanked him for removing the tempting cashews from his ling room?
The lawn example was even more troubling. Perhaps you dimly remember from Economics 101 that
unlovely term, “opportunity cost.” The idea, as your pointy-headed prof vainly tried to persuade you, is
that forgoing a gain of $10 to mow your neighbor’s lawn “costs” just as much as paying somebody else
to mow your own. According to theory, you either prefer the extra time or the extra money – it can’t be
both. And the basketball tickets refer to “sunk costs.” No sense going to the health club just because
we’ve paid our dues, right? After all, the money is already paid – sunk. And yet, Thaler observed, we do.
People do not behave like the pointy-heads say they should.
In the ordered world of economics, this rated as heresy on the scale of Galileo. According to the
standard or neoclassical school (essentially a 20
century updating of Adam Smith), people, in their
economic lives, are everywhere and always rational decision makers; those who aren’t either learn
quickly or are punished by markets and go broke. Among the implications of this view are that market
prices are always right, and that people choose the right stocks, the right level of savings – indeed, they
coolly adjust their rates of spending with each fluctuation in their portfolios, as though every consumer