Richard Thaler
Professor, The University of Chicago Booth School of Business
01:57

How Can We Incentivize Prudence?

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Richard Thaler wants more “skin in the game” to encourage money managers to avoid risks.

Richard Thaler

Richard H. Thaler is an American economist. He is perhaps best known as a theorist in behavioral finance, and for his collaboration with Daniel Kahneman and others in further defining that field.

 

He currently teaches at the University of Chicago Booth School of Business, and is an associate at the National Bureau of Economic Research, and has organized a series of behavioral finance seminars along with Robert Shiller, another behavioral finance expert at the Yale School of Management. Previously he taught at Cornell University and the MIT Sloan School of Management

 

Thaler has written a number of books intended for a lay reader on the subject of behavioral finance, including "Quasi-rational Economics" and "The Winner's Curse," the latter of which contains many of his Anomalies columns revised and adapted for a popular audience.

 

Most recently Thaler is coauthor, with Cass R. Sunstein, of "Nudge: Improving Decisions About Health, Wealth, and Happiness" (Yale University Press, 2008).

Transcript

Question: How can firms incentivize prudent financial transactions?

 

Richard Thaler: One simple step firms can take is make sure that people that are getting paid a lot of money, say more than a million or two, that a big chunk of that money is deferred. That’s going to change the whole ballgame. The money has to be deferred with what they call “clawback,” which means they can get it back if I lose it all. So that guy making ten million a year selling credit default swaps, if we’re going to keep five million of it in escrow for ten years, and with the right to go back and get it, if he starts losing money, then we’re going to give people the right incentives not too take so much risk.

The same with the mortgage brokers that were selling people mortgages they couldn’t afford. We shouldn’t pay them on each mortgage they write. They should have what they call “skin in the game,” where they’ve got to reimburse us if the guy who sold the mortgage defaults.

I think that there are lessons that the financial services industry can learn and, as I said, they should either aggressively take these steps on their own or expect Congress to act.

 

Recorded on: June 19, 2009.


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