Money management has arguably become commoditized, with the ubiquity of online brokerage services, model portfolios and low-cost providers like Vanguard and T. Rowe Price. Richard Thaler has given advisors equipment to remain distinctive: behavioral economics, a field that uses cognitive psychological theories to understand how individuals make economic decisions. It upended a once deeply entrenched assumption in economics that individuals were always well informed and disciplined, and made rational decisions that were in their best interests.

Thaler, now a professor at the University of Chicago, along with cognitive psychologists Daniel Kahneman, a Nobel laureate, and the late Amos Tversky, pioneered and shaped the field of behavioral economics thirty years ago at Stanford University. Among other breakthroughs, Thaler introduced the idea of choice architecture, which is the structuring of choices in a manner that encourages good decisions. Financial planners, he says, are choice architects.

A PILLAR

"What we've learned from Dick and many others in the field has substantially influenced how we practice," says Harold Evensky, founder of Evensky & Katz Wealth Management in Coral Gables, Fla. "As practitioners we deal with real people, not rational people. So his work and what he says are credible."

Thaler's ideas have buttressed areas of specialization in the advisory profession like life planning and financial therapy, adds Richard S. Kahler, president of Kahler Financial Group in Rapid City, S.D. "Advisors who don't develop the skills to understand behavioral concepts and clients' relationships with money will probably be advisors who are out of business 10 years from now," he says.

Along with Shlomo Benartzi, Thaler published Save More Tomorrow: Using Behavioral Economics to Increase Employee Savings in 2004. The paper described a program at a manufacturing company that allowed 401(k) plan participants to increase their savings rate automatically with every raise. Eighty percent of participants stayed in the plan through four raises and almost quadrupled their savings rates. "That paper is a beautiful example of how you can put philosophical research into something an advisor can use," Kahler says.

In his best-selling book Nudge: Improving Decisions About Health, Wealth, and Happiness, written with Cass Sunstein, Thaler first used the term "choice architect" to describe thosewho create environments where others make choices. "The principle of Nudge is that there are ways to help people make better decisions that they themselves can live with," Thaler says. "That is what a financial advisor's goal should be."

He also eats what he cooks. Thaler is a principal at Fuller & Thaler, an asset management firm in San Mateo, Calif., that caters to public pension plans and has $1 billion under management. His investment approach is, of course, heavily influenced by his work.

WORKING WITH ADVISORS

Thaler took a lot of heat for his initial efforts to understand how psychology and economics interact. "Most [economists] ignored it, and the ones who paid attention were hostile," he recalls. Financial planners, however, embraced his ideas. It helped that he made a couple of important friends in the profession in Evensky and Deena Katz, co-founder of Evensky & Katz. In the early 1990s, they invited Thaler to present at a high-level wealth management conference sponsored by JPMorgan Chase. Evensky says today that it was one of the best wealth management conferences he has attended.

Since then, Thaler has spoken frequently to advisors at industry events. When he autographs copies of Nudge, he inscribes: "Nudge for good," reminding advisors of their responsibility to clients.