In the wake of famed economist Richard Thaler recently winning the Nobel Prize, the SCU Leavey School of Business looked deeper into SCU’s historical role in the development of the behavioral economics field.
Leavey Finance professor Hersh Shefrin and Thaler’s pioneering 15-year collaboration grew out of a mutual dissatisfaction with how neoclassical economics trivialized psychology’s role in financial behavior. In the 1970s, the duo formalized “the concept of temptation” into seminal research that modeled the ways in which “humans quite often behaved differently from the norms assumed by traditional economic models.”
In a paper entitled “An Economic Theory of Self-Control,” Shefrin and Thaler articulated their highly influential “planner-doer” model, in which the “planner,” the part of the brain that desires action can find itself in “simultaneous internal conflict” with the “doer,” the part of the brain that actually takes action.
Another important study Shefrin and Thaler undertook was a 1986 investigation into whether the source of money—“A Paycheck vs. A Home or Investment vs. A Windfall Inheritance”—changed the way SCU MBA students perceived it. Shefrin explains, “Our Santa Clara students were the first to provide evidence in a systematic way that said it really matters in what form you get your wealth.” Their research revealed that students were much more willing to spend wealth from paychecks and inclined to save wealth from inheritance, for instance.
Last but not least, Shefrin’s collaboration with SCU Glenn Klimek professor of finance Meir Statman “launched the literature in behavioral finance,” providing the “first empirical evidence of the ‘disposition effect,’ in which are loath to unload losing stocks.” Their paper “Ethics, Fairness and Efficiency in Financial Markets” explored “how people save and invest, factoring in the impact of psychological phenomena.”
Statman reflects on the tangible impacts of his distinguished career. “The fact that [my collaborations] … led to a system for helping people save more, is a source of pride for me.”