Integrating Economics With Psychology – Prize in Economic Sciences 2017

Richard Thaler of the University of Chicago has been awarded this year’s Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel ‘for his contributions to behavioural economics’.

‘Thaler’s contributions have built a bridge between the economic and psychological analyses of individual decision-making’, the members of the Prize Committee said in their announcement of this year’s laureate. Speaking by telephone to the press conference, Thaler summarised the main impact of his work as being that ‘Economic agents are human and economic models have to incorporate that’. When asked whether he will act ‘humanly’ in spending the prize money, he joked ‘I will try to spend it as irrationally as possible!’

 

Econ FeatureRichard H. Thaler, laureate of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2017. Picture/Credit: Nobel Media, Illustration by N. Elmehed

 

Thaler’s research incorporates psychologically realistic views into analyses of economic decision-making, relaxing what was once the standard assumption that everyone in the economy is rational and selfish. The Nobel citation focuses on three areas of achievement: ‘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’.

Limited rationality: Thaler has developed the theory of mental accounting, which explains how people simplify financial decision-making by creating separate accounts in their minds. He also showed how ‘loss aversion’ explains why people value the same item more highly when they own it than when they don’t.

Social preferences: Thaler has shown how people’s concerns about fairness may stop firms from raising prices in periods of high demand, but not in times of rising costs. With colleagues, he devised the ‘dictator game’, an experimental tool for measuring people’s attitudes to fairness.

Lack of self-control: Thaler has demonstrated how succumbing to short-term temptation is an important reason why we fail in our long-term plans to save for old age or make healthier lifestyle choices. His idea of ‘nudges’ is intended to help people exercise better self-control.

 

 

Originally from East Orange, New Jersey, Thaler attended Case Western Reserve University, where he received a bachelor’s degree in 1967. Soon after, he attended the University of Rochester where he received a master’s degree in 1970 and a PhD in 1974. Since 1995, he has been at the University of Chicago Booth School of Business, where he is Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics and director of the Center for Decision Research.

Alongside Robert Shiller, co-recipient of the 2013 Nobel Prize in Economic Sciences, Thaler is co-director of the Behavioral Economics Project at the National Bureau of Economic Research, funded by the Russell Sage Foundation. He is co-author with Cass Sunstein of the bestselling book Nudge: Improving Decisions about Health, Wealth, and Happiness (2008) in which the concepts of behavioural economics are used to tackle many of society’s major problems. And he has even made an appearance in a Hollywood film, explaining the ‘hot hand fallacy’ in The Big Short.

The Lindau Nobel Laureate Meetings offers sincere congratulations to the new laureate and hopes to hear from him in person about his research at the next Lindau Meeting on Economic Sciences in 2020.

Romesh Vaitilingam

About Romesh Vaitilingam

Romesh Vaitilingam is a writer and media consultant, and a member of the editorial board of Vox. He is the author of numerous articles and several successful books in economics, finance, business and public policy, including The Financial Times Guide to Using the Financial Pages (FT-Prentice Hall), now in its sixth edition (2011). As a specialist in translating economic and financial concepts into everyday language, Romesh has advised a number of government agencies and international institutions, including the European Central Bank, the European Bank for Reconstruction and Development and the UK's Department for International Development. His work also involves consultancy for the economic research community, notably advising the Royal Economic Society, the Centre for Economic Performance at LSE and the Centre for Economic Policy Research on the management and development of their public profile; and training economists in communication skills. In 2003, he was awarded an MBE for services to economic and social science.

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