The concept of self-control is incorporated in a theory of individual intertemporal choice by modeling the individual as an organization. The individual at a point in time is assumed to be both a farsighted planner and a myopic doer. The resulting conflict is seen to be fundamentally similar to the agency conflict between the owners and managers of a firm. Both individuals and firms use the same techniques to mitigate the problems which the conflicts create. This paper stresses the implications of this agency model and discusses as applications the effect of pensions on saving, saving and the timing of income flows, and individual discount rates.

Richard H. Thaler delivered his Prize Lecture on 8 December 20167 at the Aula Magna, Stockholm University.

In recent years there has been growing interest in the mixture of psychology and economics that has come to be known as “behavioral economics.” As is true with many seemingly overnight success stories, this one has been brewing for quite a while. My first paper on the subject was published in 1980, hot on the heels of Kahneman and Tversky’s (1979) blockbuster on prospect theory, and there were earlier forerunners, most notably Simon (1955, 1957) and Katona (1951, 1953). The rise of behavioral economics is sometimes characterized as a kind of paradigm-shifting revolution within economics, but I think that is a misreading of the history of economic thought. It would be more accurate to say that the methodology of behavioral economics returns economic thinking to the way it began, with Adam Smith, and continued through the time of Irving Fisher and John Maynard Keynes in the 1930s. In spite of this early tradition within the field, the behavioral approach to economics met with considerable resistance within the profession until relatively recently. In this essay I begin by documenting some of the historical precedents for utilizing a psychologically realistic depiction of the representative agent. I then turn to a discussion of the many arguments that have been put forward in favor of retaining the idealized model of Homo economicus even in the face of apparently contradictory evidence. I argue that such arguments have been refuted, both theoretically and empirically, including in the realm where we might expect rationality to abound: the financial markets. As such, it is time to move on to a more constructive approach. On the theory side, the basic problem is that we are relying on one theory to accomplish two rather different goals, namely to characterize optimal behavior and to predict actual behavior. We should not abandon the first type of theories as they are essential building blocks for any kind of economic analysis, but we must augment them with additional descriptive theories that are derived from data rather than axioms. As for empirical work, the behavioral approach offers the opportunity to develop better models of economic behavior by incorporating insights from other social science disciplines. To illustrate this more constructive approach, I focus on one strong

Many observers of the current economic scene are concerned about the low rate of personal saving in the United States. One well-known researcher, Laurence Kotlikoff (1992), calls the situation a crisis. He proposes that each American worker receive an annual statement from the Social Security Administration with projected benefits upon retirement, arguing that: each of us got [this statement] our attention would be caught and perhaps our of saving, which is in such urgent need of redress, would really change (p. 107). I agree with the thrust of Kotlikoff's recommendations, and join him in applauding steps that will alter the general public's of However, as economists, we need to recognize that the economic theory of saving is similarly in urgent need of redress. If we are to understand why people are saving so little and are to make helpful recommendations as to how to get people to save more, we have to incorporate more of the of saving into our economic theories. Kotlikoff's policy proposal, while a sensible one, highlights the growing gap between theory and policy prescription in this domain. If households are acting in accordance with the life-cycle theory of saving, then undersaving is impossible, so why do they need to have their psychology redressed? And, how does this psychology fit into the model? This example reflects an increasing frustration in the economics community about personal saving. Many observers have come to the conclusion that the low saving rate represents an important problem on two fronts: macroeconomists worry that the low saving rate will produce too little investment, and microeconomists worry that individuals, particularly the baby boomers, are not putting enough away to finance a satisfactory lifestyle in retirement. These are serious concerns. However, the frustration comes from the realization that, even if there was agreement that the saving rate needs to go up, economic theory offers little help in constructing a solution. In the standard life-cycle framework the only policy variable is the after-tax rate of return to saving. Yet it is well known that the theory does not specify the sign of the relationship between the saving rate and the interest rate. Raising the interest rate increases the returns to saving but decreases the amount of saving necessary to yield any given future consumption level. Furthermore, empirical estimates offer little help. Most studies are unable to reject the hypothesis that the elasticity of personal saving with respect to the interest rate is zero. Clearly this is frustrating: the theory only gives us one lever to use, and we don't know whether to push or pull! With this background, I wish to supply what should be considered good news: the theory is misspecified. Life-cycle models of saving fail to describe actual household saving in three important ways. This failure of the theory is good news because by incorporating some basic we can enrich the theory and generate specific policy recommendations. In this paper I will begin by characterizing the problems with the theory and then go on to discussing the implications of modifying the theory.

Many dividend theories imply that changes in dividends have information content about the future earnings of the firm. The authors investigate this implication and find only limited support for it. Firms that increase dividends in year 0 have experienced significant earnings increases in years -1 and 0, but show no subsequent unexpected earnings growth. Also, the size of the dividend increase does not predict future earnings. Firms that cut dividends in year 0 have experienced a reduction in earnings in year 0 and in year -1, but these firms go on to show significant increases in earnings in year 1. However, consistent with Lintner's model on dividend policy, firms that increase dividends are less likely than nonchanging firms to experience a drop in future earnings. Thus, their increase in concurrent earnings can be said to be somewhat 'permanent'. In spite of the lack of future earnings growth, firms that increase dividends have significant (though modest) positive excess returns for the following three years.