Richard Thaler

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If Thaler ever appeared on Booknotes, it might look a bit like this interview.

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A video of the lecture Thaler recently delivered at the Yale Law School, titled “The Behavioral Economics of Swindling and Selling: A Lecture in Honor of Arthur Leff,” is now online.

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Another point worth pulling out separately from Thaler’s Economic View column today. The term “small business” is one where common public ideas and images are wildly divorced from how the government classifies and treats it. For most people, small business means a mom-and-pop store. To the IRS, it means nothing more than a business where the owners’ profits get reported as personal income on a tax form.

Partnerships and firms structured as S corporations are examples. This category can include businesses as diverse as barbershops, car washes, hedge funds and law firms. Goldman Sachs was in this category before it became a public company.

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From today’s Economic View column:

Want to give affluent households a present worth $700 billion over the next decade? In a period of high unemployment and fiscal austerity, this idea may seem laughable. Amazingly, though, it is getting traction in Washington.

I am referring, of course, to the current debate about whether to extend all, or just some, of the tax cuts of President George W. Bush — cuts that are due to expire at year-end. They’re expiring because the only way they could be enacted initially was by pretending that they were temporary.

In this situation, it’s not clear what should be called a tax “cut.” If the temporary law is allowed to expire as planned, does that represent a return to normal, or a tax increase? Conversely, if some parts of the current rates are extended, should those count as a tax cut?

Psychologists call these descriptive choices “framing.” No one is proposing that tax rates be lower than they are now, so the question is whether some people should pay more, and, if so, who.

The rest is here.

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We shouldn’t expect that the competition to become a top manager will weed out overconfidence. In fact, the competition may tend to select overconfident people. One route to the corner office is to combine overconfidence with luck, which can be hard to distinguish from skill. C.E.O.’s who make it to the top this way will often stumble when their luck runs out.

From Richard Thaler’s latest Economic View column.

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In his Economic View column:

How confident should a team be that this early pick is better? Suppose we rank all the players at a given position — running back, linebacker, etc. — in the order they were picked in the draft, then compare any two in consecutive order on the list. What do you think is the chance that the player picked higher will turn out to be better — as judged, say, by number of games started in his first five years in the league?

If teams knew nothing, the answer would be 50 percent, as it would be for flipping a coin. If they had perfect knowledge, the answer would be 100 percent. Go ahead, make your guess.

The answer is 52 percent — an outcome that is barely better than that of a coin flip. This means that although the value of players declines throughout the draft, quality declines more slowly than compensation — players picked early are very highly paid. As a result, the first pick in the draft has often provided less value to his team, in performance per dollar, than the last pick in the first round (the one awarded to the Super Bowl winner). In other words, in the world of the N.F.L. draft, the rich get richer.

NFL teams have been using something called the Chart to help them decide how much one pick is worth versus another. Given how poorly the Chart actually measures pick value, you’d think someone creative at an NFL team would have devised a new one based on this research.

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Richard Thaler was at Yahoo! Labs 2010 Big Thinkers Speaker Series the other week.

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A video from the Newshour with Jim Lehrer.

Q: But what about the mentality of the investors, the markets that need to gain confidence? What do we know about what drives that on a given day or what it takes to turn it around?

Thaler: Well, I think we don’t know much. I think one thing that should be stressed is that we don’t really know whether there is a panic here. We have lots of uncertainty. And when there’s lots of uncertainty, we expect volatility. People can’t really make sense of this.

The other thing I would say is that whatever is going on is primarily being driven by professionals. This is not a retail panic. And I’m not sure that there is a panic.

People are reacting to very real things. The credit crunch is quite real. And people in the money management side are worried about people withdrawing their money. They’re having trouble borrowing. And so they have to reduce leverage, and all of that drives prices of risky assets down.

A radio interview on The World. “There’s a tendency to talk about this as a panic, and maybe there’s a panic, but frankly there’s an even scarier interpretation of what’s going on, which is this isn’t a panic, it’s actually quite real. Things are as bad as we’re fearing, and that we’re just going to have to suck it up and live a bit more frugally.”

And a CNN clip on Nudge. The reporter is tempted by french fries.

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Richard Thaler appeared last week on Tavis Smiley’s PBS show. You can listen to the interview here. Tavis brings up a nudge at McDonald’s.

Tavis: I think of a friend now who may be watching who is a McDonald’s franchisee. He owns a number of stores. I remember being in a conversation not too long ago. He, of course, is no behavioral scientist. He’s an entrepreneur, but he was expressing to me one day his surprise at how, when inside the store they put up the special, you’d be amazed, he said to me, at the number of people who, when they get to the counter, came to get one thing, but we nudge them to buy this because they see that today, Wednesday, is the two cheeseburger special. You put it in front of them and you nudge them toward it and they go for it.

Thaler: Well, you know, one of the things that makes nudges work is just getting peoples’ attention.

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