At a banquet prior to accepting his Economics Nobel Prize, Richard Thaler observed:
So what did I discover to get up here? I discovered the presence of human life in a place economists thought it did not exist: the economy.
You might think this to be a rather obvious observation. Customers are human and so are employees. Indeed, even CEOs are usually human. How could economists have missed this?
Of course, economists do engage with other humans on a regular basis, and often find their behavior to be deeply flawed. At economist dinner parties one can often hear them ridiculing the flawed economic choices made by their spouses, Deans, students, political leaders, and even members of the Economics Nobel Prize committee. But these decision making flaws did not make their way into economic theories.
Instead, economic models were populated with “agents.” These economic agents behave more like robots than humans. They solve problems like a super computer, have the willpower of saint, are free of emotion, and have little regard for their fellow agents….
So I would like to end with a simple toast. This is phrase I write when asked to sign books. It is simple idea, but an important one, because we are only human.
Nudge for good.
His fellow Nobel prize winners, Akerlof and Shiller, pointed out the humans Professor Thaler found in the economy don’t just respond to a nudge for good, but also like a good story.
The work of these Nobel prize winners supports both the Information Economic theories I have developed and the Transparency Label Initiative.
Regular readers know the Information Matrix links humans as economic agents to humans as behavioral beings with a fondness for a good story.
|Does Seller Know What They Are Selling?|
|Does Buyer Know What They are Buying?||Yes||No|
|Yes||Perfect Information||Antique Dealer Problem|
|No||Lemon Problem||Blind Betting|
In the presence of Perfect Information, humans, as investors, have the ability to act like the economic agents in the economists’ models. When investors know what they own or are thinking of buying, investors can actually perform the fundamental risk/return assessment on their investments. It is only in this quadrant, investors can both satisfy their fondness for a good story and also “Trust, but Verify” the story told by Wall Street.
Naturally, Wall Street prefers investors don’t verify its story and instead invest in the Blind Betting quadrant. In this quadrant, the valuation of any investment is based solely on the story told by Wall Street. However, the absence of all the useful, relevant information means when Wall Street’s story is called into doubt, there is no logical stopping point in the downward valuation of these investments. As a result, panic, one of the most basic human emotions, sets in when the story told by Wall Street is called into doubt.
Regular readers know the Transparency Label Initiative serves as the nudge for good in the global financial system. It reminds investors to limit their exposure to what they can afford to lose investing in the opaque securities Wall Street tells a good story about.