US economist Richard Thaler won the Nobel Economics prize on Monday for showing that economic and financial decision-makers are not always rational, but mostly deeply human.
Bridging the gap between economics and psychology, Thaler’s research focuses on behavioural economics
which explores the impact of psychological and social factors on decisions by individuals or groups in the economy and financial markets.
‘He’s made economics more human,’ the Nobel jury said, calling Thaler ‘a pioneer’ on integrating economics and psychology.
Thaler is well-known for co-founding the ‘nudge’ theory, which demonstrates how people can be persuaded to make decisions that leave them healthier and happier.
‘By exploring the consequences of limited rationality, social preferences, and lack of self-control, he has shown how these human traits systematically affect individual decisions as well as market outcomes,’ the jury’s statement said.
‘His empirical findings and theoretical insights have been instrumental in creating the new and rapidly expanding field of behavioural economics, which has had a profound impact on many areas of economic research and policy.’
He has advised several governments, including in Denmark and France.
His work even earned him a glamorous foray into the movie business when he made a cameo appearance, alongside Christian Bale, Steve Carell and Ryan Gosling, in the 2015 movie ‘The Big Short’ about the credit and housing bubble collapse that led to the 2008 global financial crisis.
Thaler told the Nobel committee by teleconference he was ‘pleased’ by the award.
‘I no longer will have to call my colleague Eugene Fama ‘Professor Fama’ on the golf course,’ he joked, referring to his University of Chicago colleague who won the prize in 2013.
‘I think the most important recognition is that economic agents are human, and economic models have to incorporate that,’ he said.
The 72-year-old takes home the nine million kronor (944,000 euros, $1.1 million) prize sum, which he jokingly said he would ‘try to spend it as irrationally as possible.’
Thaler is a professor at the University of Chicago – a school popular with the Nobel economics committee. Of 79 laureates so far, more than a third have been affiliated with the university’s school of economics.
One of the founders of behavioural finance, which studies how cognitive limitations influence financial markets, Thaler developed a model for explaining how people tend to focus on the narrow impact rather than the overall effect of each decision they make, which is called limited rationality.
This includes the study of how people’s loathing of losses can explain why they value the same things more when they own them as opposed to when they don’t, which is called the endowment effect.
Thaler has also shown that New Year’s resolutions can be hard to keep – no matter how much people wish to fulfil them.
Using a planner-doer model, he showed how short-term temptations disrupt people’s plans to save for their old age, rainy days or live a healthier lifestyle.
‘In his applied work, Thaler demonstrated how nudging – a term he coined – may help people exercise better self-control when saving for a pension, as well in other contexts,’ the Nobel jury said.
Thaler and his US counterpart Cass Sunstein turned ‘nudge’ into a political buzzword with their 2008 book of the same name.
In Britain, former prime minister David Cameron set up a team in 2010 nicknamed the ‘nudge unit’ to reshape a swath of policies and gently prod Britons to make the right decisions to make them healthier and happier.
Influential in theoretical and experimental research on fairness, Thaler showed ‘how consumers’ fairness concerns may stop firms from raising prices in periods of high demand, but not in times of rising costs’, the Nobel economics committee said in a statement.
Thaler and his colleagues created a tool called ‘the dictator game’ that was used in several studies to measure attitudes to fairness among people from around the world.
Designed to assess how individuals respond to situations where self-interest and equality clash, the experiment gives one of the participants, known as ‘the dictator’, money while the ‘receiver’ is given nothing.
The economics prize is unique among the Nobel awards in that it was created by the Swedish central bank in 1968 – the others were all set up through the 1895 will of Swedish inventor and philanthropist Alfred Nobel.
It wraps up the 2017 Nobel season, which saw the anti-nuclear campaigners ICAN win the peace prize and Britain’s ‘The Remains of the Day’ author Kazuo Ishiguro take the literature prize.
The laureates will receive their prizes at ceremonies in Stockholm and Oslo on December 10, the anniversary of the death of Alfred Nobel.
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