The Nobel Prize for Economics, the most prestigious prize in the field, has been awarded this year to American economist Richard Thaler. The prize, fully titled The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, was announced by The Royal Swedish Academy of Sciences and will be awarded in a ceremony in Stockholm in December.
Professor Thaler is currently the Charles R. Walgreen Distinguished Service Professor Of Behavioral Science And Economics at Chicago Booth, the University of Chicago School of Business, and has previously worked at the SC Johnson College of Business at Cornell University as well as acting as the co-director of the National Bureau of Economic Research Behavioral Economics Project since 1991.
The Nobel prize was given to Professor Thaler for his foundational work in behavioural economics. He combined insights from the fields of economics and psychology to show how human psychology affects both individual decisions and market outcomes.
His work in behavioural economics has been on three primary topics: limited rationality, social preferences, and lack of self-control. His research into the topic of limited rationality looked at how people make financial decisions, and why it is that people make decisions that seem to be against their best interest. For example, why do people choose to satisfy short-term cravings instead of working towards long-term goals? He found that people tend to create a simplified and separate account in their mind for each decision, and to make decisions based on that account rather than considering the larger consequences of any given decision. This work has lead to the development of what is termed the mental account theory, which has changed how economists think about the rationality of decision making.
The second of Thaler's main topics is social preferences, and the concept of fairness in particular. The idea of fairness applies to economics in terms of what kind of pricing consumers find acceptable from businesses. For example, consumers tend to be accepting of price increases in goods which are due to rising costs of materials or manufacturing, but they are not accepting of price increases due to high demand. Consumers find it fair to raise prices if materials become more expensive, but if a company raises prices because demand is high, consumers see this as unfair and as taking advantage. Thaler and colleagues researched the ways in which concepts of fairness differ in different societies around the world.
The third topic, lack of self-control, was analysed using the planner-doer model, which differentiates long-term planning from short-term action. Humans tend to default to the short-term doing reactions rather than long-term planning, however, it is possible to change this. Thaler coined the terming “nudging” to refer to the giving of small suggestions or interventions in order to encourage people to consider their long-term needs. For example, nudging people to save for their pensions by making the contributions automatically deducted from their income rather than something they have to actively set aside makes people save more consistently. This is the area for which Thaler is best known by the public, thanks to his popular book Nudge: Improving Decisions about Health, Wealth, and Happiness which explains how these concepts can be applied to social decision making.
These three areas of study are not only important and socially relevant in their own right, but the combination of them also laid the foundation for the development of behavioural economics as a field. The bringing together of the disciplines of economics and psychology was driven by Professor Thaler's theories and his empirical findings, and it is for this foundational work in the field which he has been recognised by the Nobel committee.
If you'd like to learn more about the Nobel prizes, then have a look at our post from last year about the 2016 Nobel Prize winners.
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