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Nobel Prize in Economics Awarded to Richard H. Thaler

Richard H. Thaler, one of the founding fathers of “nudge” theory, which has helped boost British tax receipts and encouraged smokers to become vapers, has been awarded the 2017 Nobel prize for economics, for his contributions to behavioral economics.

Richard H. Thaler co-wrote a bestselling book on the nudge concept, read by politicians around the world and soon had them embracing the notion that people can be influenced by prompts – such as changing the wording of tax demands – to alter their behavior.

The Nobel committee said the 72-year-old, has provided a “more realistic analysis of how people think and behave when making economic decisions.” When asked what he planned to do with his 9-million Krona (£840,000) prize money, Thaler joked that he intended to spend it “as irrationally as possible”, in a nod to his work showing how people’s choices on economic matters are not always rational.

The US academic, who is a professor at the University of Chicago, has previously suggested that Brexit could be an example of behavioral economics in action. He argued British voters chose an economically irrational route when considering the options put in front of them by social elites and the mainstream media.

In 2008, Thaler co-wrote the global bestselling book ‘Nudge: Improving Decisions about Health, Wealth, and Happiness’ with the US professor Cass Sunstein, which brought the theory to wider attention. He was an adviser on the creation of the “nudge unit” at the heart of Whitehall, initiated as a pet project by David Cameron in the earliest days of his premiership from 2010 in the coalition government.

The Nobel committee credited Thaler for developing the theory of mental accounting, explaining how people simplify financial decision-making by creating separate accounts in their minds, focusing on the narrow impact of each individual decision rather than its overall effect. He also showed how aversion to losses can explain why people value the same item more highly when they own it than when they don’t, a phenomenon called the endowment effect.

Thaler’s theoretical and experimental research on fairness has also been influential. He showed how consumers’ fairness concerns may stop firms from raising prices in periods of high demand, but not in times of rising costs. Thaler and his colleagues devised the dictator game, an experimental tool that has been used in numerous studies to measure attitudes to fairness in different groups of people around the world.

Thaler had also shed new light on the old observation that New Year’s resolutions can be hard to keep. He showed how to analyze self-control problems using a planner-doer model, which is similar to the frameworks psychologists and neuroscientists now use to describe the internal tension between long-term planning and short-term doing. Succumbing to short-term temptation is an important reason why our plans to save for old age, or make healthier lifestyle choices, often fail.

In total, Richard Thaler’s contributions have built a bridge between the economic and psychological analyses of individual decision-making. His empirical findings and theoretical insights have been instrumental in creating the new and rapidly expanding field of behavioral economics, which has had a profound impact on many areas of economic research and policy.

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