American professor Richard H. Thaler, who has incorporated psychologically realistic assumptions into analyses of economic decision-making, has won the 2017 Nobel Prize in Economics for his work – hailed as making economics more human.
“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,” Nobel Prize organization said in a statement.
Thaler, who teaches at the University of Chicaog, developed 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.
His work has 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 was one of the founders of the field of behavioral finance, which studies how cognitive limitations influence financial markets.
The Nobel Prize oranization notes that Thaler’s theoretical and experimental research on fairness has 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, a statement on the Nobel Prize website said.
Quite importantly, Thaler has also shed new light on the old observation that New Year’s resolutions can be hard to keep. He showed how to analyse 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, the website said.
“Succumbing to shortterm temptation is an important reason why our plans to save for old age, or make healthier lifestyle choices, often fail. 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.
“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.”
Meanwhile, in an interview Thaler told an official of the Nobel Prize organization that “Our research has greatly changed pensions systems all around the world.”
Richard H. Thaler describes some of the impacts of his work on behavioural economics in this telephone interview recorded immediately after the public announcement of the award of his Prize in Economic Sciences. He also explains the concept of the ‘’nudge’, and looks forward to being in Stockholm again with his old friend Daniel Kahneman, Laureate in Economic Sciences from 2002.
Here is a transcript of Thaler’s interview with Adam Smith, Chief Scientific Officer of Nobel Media as released by the website:
[Richard H. Thaler]: Hello
[Adam Smith]: Hi, this is Adam Smith, calling from Nobelprize.org, the website of the Nobel Prize in Stockholm.
[RT]: Yes.
[AS]: Well first of all, congratulations on the award of the Prize in Economic Sciences.
[RT]: Thank you.
[AS]: May I ask how the news reached you?
[RT]: It woke me up.
[AS]: [Laughs]. Nice way to be woken.
[RT]: Yeah. It’s good to see Sweden on your cell phone.
[AS]: Of course. People will perhaps best know you for your book Nudge, published almost a decade ago. For those who don’t know could you describe what a nudge is?
[RT]: A nudge is some feature of the environment that changes the behaviour of humans but would not change the behaviour of rational economic agents, what we call Econs. So, for example, the research I was talking about in Stockholm a couple of weeks ago was about two nudges in the Swedish pension system, one was creating default funds that people would take if they didn’t make a choice, and then the other was an advertising campaign encouraging people to not to take the default. The paper that we’re now writing is sort of a battle of those two nudges.
[AS]: Right, yes, What’s your favourite example of a successful nudge?
[RT]: Well you know, I would say probably the most successful has been the use of what we call automatic enrolment in pension plans. Meaning the default is to join rather than not to join.
[AS]: Right.
[RT]: For example this has been used in a recent roll out of the national pension saving plan in the UK, and the enrolment rates are well over 90%.
[AS]: It’s 15 years since your friend Daniel Kahneman was awarded the Prize. I suppose since then what we’ve seen is an absolute blossoming of the field of behavioural economics. Has it reached a point do you think where it can be used for making tools for setting public policy?
[RT]: Well sure. I mean that’s what somebody asked me to come over to Stockholm to talk about three weeks ago. And I think our research has greatly changed pension systems all around the world. The idea of Save More Tomorrow where you invite people to commit themselves to saving move sometime in the future has been quite successful. We think there may be as many as 25 million people in the US involved in that programme. Countries all around the world, starting with the UK, have started behavioural insight teams, often referred to as nudge units. And they seem to be doing lots of good.
[AS]: Just a last thing, we all like to think we’re different don’t we? But somehow your work brings us all into a unifying theory. Is there a kind of disparity there between people’s individual belief in their own individuality and …
[RT]: Oh sure. People are different. The key finding from Kahneman and Tversky’s research is not that everybody is the same but that on average we tend to err in the same direction. So we all think that we’re going to finish projects sooner that we will. Although some people procrastinate more than others.
[AS]: Yeah. I think that describes me.
[RT]: Yeah. And my home contractor at the moment.
[AS]: [Laughs]. You sound very calm, how do you feel?
[RT]: Uhh. Well, not calm.
[AS]: Master of understatement. Will we look forward to welcoming you to Stockholm in December?
[RT]: Uh yes. I had the pleasure of coming with Prof. Kahneman and he keeps telling me I better win it soon because he wants to go back. So it’ll be a pleasure to ask him to join me again.
[AS]: Oh that’s gorgeous. And you will reverse roles …
[RT]: Yes.
[AS]: … See it from different perspective. OK, well, we very much look forward to having you here. Once again, congratulations.
[RT]: Thank you.
[AS]: And thank you for speaking to me. Bye bye.
