This weekend is a big one for behavioral economics. This morning, Richard Thaler, laureate of The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2017, has presented his prize lecture “From Cashews to Nudges: The Evolution of Behavioral Economics” in The Royal Swedish Academy of Sciences.
And this Sunday will be the Nobel Prize Award Ceremony, Prof. Thaler will finally receive his well-deserved Nobel prize.
Thanks to everyone who came and many thanks for the very warm welcome at the end. Truly touched. https://t.co/aXMax86gDS
— Richard H Thaler (@R_Thaler) December 8, 2017
To celebrate this occasion, I am honored to share with you my interview with two of the best co-authors of Prof. Thaler — Hersh Shefrin and Shlomo Benartzi.
Q7
In your career, you have focus relatively more on behavioral finance research. In general, do you think there are differences between behavioral finance and behavioral economics? And why behavioral finance is the choice of yours?
Shefrin: Well, having been a faculty member in both departments at different times, economics and finance, I view financial economics as a subfield of economics. Therefore, I view behavioral finance as a subfield of behavioral economics. Finance tends to focus on risk and return, and there are many issues in economics that do not relate directly to the risk-return tradeoff. One example is price gouging, an issue that Thaler and his co-authors analyze from the perspective of fairness.
As for me, I focused on behavioral finance early on for two reasons. First, the psychological literature on heuristics and biases had its most natural implications for finance. Second, I had begun to partner with my finance colleague Meir Statman, who was especially keen to bring psychological insights to finance per se. Psychologists Daniel Kahneman and Amos Tversky gave us prospect theory, which in 2002 the Nobel committee noted as the main contribution for the award bestowed on Kahneman, Tversky having passed away some years earlier. Statman and I were the first to introduce prospect theory into the finance literature, the first to introduce self-control framework into the finance literature, and the first to organize a session in behavioral finance at the American Finance Association.
Coming back to Thaler, I think it fair to say that before Thaler began to work in behavioral finance, we were also applying some of his new insights about hedonic editing to finance as well. In a nutshell, Statman and I regarded behavioral finance as a gold mine with a lot of gold to be mined; and that is the short answer to the question of why.
