Lessons in value investing from Nobel Prize winner Richard Thaler

The work of Richard Thaler, who has just been awarded the 2017 Nobel prize in economic sciences, offers plenty of food for thought for value investors – including a paper inspired by daytime television


Juan Torres Rodriguez

Juan Torres Rodriguez

Research Analyst, Equity Value

In the great Venn diagram of life, there has been limited overlap between daytime television and the Nobel prize.

Now, however, that niche has been filled by Richard Thaler – behavioural finance expert, author and inspiration of more than one article, here on The Value Perspective  who has recently been awarded the 2017 Nobel prize in economic sciences.

According to the University of Chicago, where he is professor of behavioural science and economics, Thaler studies “the psychology of decision-making that lies in the gap between economics and psychology” and “investigates the implications of relaxing the standard economic assumption everyone in the economy is rational and selfish – instead entertaining the possibility some of the agents in the economy are sometimes human”.

Thaler is also the author of a number of books, including Nudge: Improving Decisions about Health, Wealth and Happiness, which is said to have influenced the thinking of former chancellor George Osborne – and thus UK government policy – and Misbehaving: The Making of Behavioural Economics, different elements of which we have discussed in our Less is more and Portfolio theory blogs.

Deal or no Deal

And the daytime TV connection?

Well, another project of Thaler’s was co-authoring the 2008 academic paper Decision-making under risk in a large-payoff gameshow, which focused on no less a subject than Deal or no Deal.

As we illustrated in Thinking inside the box, it turns out the show, which aired in the UK from 2005 until only last year, holds a particular fascination for behavioural scientists.

One of the paper’s conclusions – that ‘losers’ and ‘winners’ generally have a weaker propensity to deal than more ‘neutral’ participants – ties in with two well-established behavioural finance traits:

  1. The ‘break-even effect’. This is when a player – or an investor – finds themselves so far in the red they end up thinking they may as well take a few big risks to try and get back to something approaching break-even.
  2. The ‘house money effect’. This time the player or investor finds themselves well ahead of the game and so they become more willing to take on more risk. The implication here is that they are not yet thinking of the money they have made as their own – and, if it is somebody else’s money, then perhaps they are a bit more willing to risk it.

In these two very specific scenarios, people tend to be more willing to take on more risk than theory suggests they should – and this happens whether the ‘game’ is Deal or no Deal or stockmarket investing.

For it is precisely when emotions are at their most extreme – when they have suffered a big loss or enjoyed a big gain – that investors tend to make their most irrational decisions.

Here on The Value Perspective, of course, we use a value investing framework as a way of maintaining our own ‘neutrality’ – striving to remove emotion from the equation and instead to focus on a dispassionate appraisal of the numbers as we buy and sell stocks.


Juan Torres Rodriguez

Juan Torres Rodriguez

Research Analyst, Equity Value

I joined Schroders in January 2017 as a member of the Global Value Investment team. Prior to joining Schroders I worked for the Global Emerging Markets value and income funds at Pictet Asset Management with responsibility over different sectors, among those Consumer, Telecoms and Utilities. Before joining Pictet I was a member of the Customs Solution Group at HOLT Credit Suisse.  

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