Richard H. Thaler, who earned a PhD from the University of Rochester, will be given the Nobel Prize in Economics on Sunday for integrating economics and psychology. He is a professor of behavioral science and economics at the University of Chicago Booth School of Business and a principal of registered investment adviser Fuller & Thaler Asset Management. The firm applies behavioral economics to investment management.
Mr. Thaler, 72, grew up in an upper-middle-class family, where his father was an actuary and "as close as you can find to a rational economic agent," he said.
Today, Mr. Thaler describes himself as a mediocre golfer and a lover of wine.
InvestmentNews: How did Fuller & Thaler Asset Management come to be?
Richard Thaler: Back in 1987, a money management firm called Concord Capital hired me as a consultant. They wanted to create strategies using behavioral economics. I would visit them quarterly. At some point, they wanted to hire a full-time research director and asked me to help. I told them where to advertise and looked through the resumes and picked out Russ Fuller from the pile.
IN: What was Mr. Fuller doing then?
RT: He was then the chairman of the finance department at Washington State University, and was managing some money for some friends and family, and had done highly practical research.
They interviewed Russ, liked him, and hired him, and we worked there together for several years. After that firm closed, Russ decided to start his own firm called RJF Asset Management and asked me to help him out by brainstorming on strategies and occasionally meeting with a prospect. But, he said, "I can't pay you anything because I am not making any money! But if I ever do make some money, I will pay you something. Plus, I will send you a good case of wine each year."
IN: How long did you work for wine?
RT: We worked on that basis until 1998, when I spent six months visiting Stanford University, a bit down the road. During that visit we spent more time together, sampling more of his wine cellar, and got to talking about how to increase his AUM. Eventually we decided to make my affiliation more formal, and changed the name of the firm accordingly in early 1999.
IN: What has your role been at the firm?
RT: My role has primarily been to help create new strategies, to try and improve existing strategies, and to think broadly about long-term strategic questions for the firm. Since I live in Chicago and the firm is in California I am not there on a day-to-day basis, but in some ways, I think that helps. Daniel Kahneman, my long-time friend who served on our board for a while, likes to talk about taking the "outside view" when making decisions. (When couples marry they think their risk of divorce is tiny, their friends who know the odds, think more realistically.) I am all about process, not stock picking. In fact, I cannot name a single stock we own. Our portfolio managers are not interested in my opinion about individual companies — and for good reason. They do that for a living. I believe in comparative advantage.
IN: Why have behavioral considerations not been part of economic theory since the beginning?
RT: Economics used to be behavioral until the late 1940s. Adam Smith talked about overconfidence, emotions and self-control problems, for example, and Keynes has a chapter on financial markets in "The General Theory" that anticipates much of behavioral finance. But people started to disappear from economics in the mathematical revolution that began after World War II, led by people such as Paul Samuelson, who set out to make economics more formal and precise. It turns out that the easiest models to write down are of people optimizing, so that is the way the field evolved, with agents getting smarter by the decade.
By the time I was in graduate school in the 1970s, the people in economic models were really smart and had no self-control problems. That seemed unrealistic to me.
IN: What has been the aftermath of winning the Nobel Prize? Are you hiding in a bunker or on a desert island?
RT: There is no desert island in sight. I've had barely time for one celebratory dinner with my wife. On the day, my phone rang at 4 a.m. and my cell phone read simply SWEDEN. That was a pretty good clue as to what was happening. After giving you the good news they ask you to make coffee because there will be a live press conference in Stockholm via Skype (audio only, thankfully) in 45 minutes.
People from the University of Chicago, where they have had much practice, arrived at the house before 7 a.m. and the media marathon began. We had a press conference at the university at 11 a.m., more interviews during the day, and then I had a class to teach at 6 p.m. Fortunately, I am co-teaching the class and my partner in crime let me go home at the break. There has barely been a letup since.
In November, many of the U.S. laureates were in Washington, D.C., for a reception at the Swedish embassy. It was great to meet some of the other winners, the real scientists.
Deborah Nason is a freelance writer.