US behavioural economist Richard Thaler wins Nobel
WASHINGTON: Richard H Thaler was awarded the Nobel Memorial Prize in Economic Science on Monday for his contributions to behavioural economics.
Professor Thaler, born in 1945 in East Orange, New Jersey, works at the University of Chicago’s Booth School of Business. The Nobel committee, announcing the award, said that he was a pioneer in applying psychology to economic behaviour and in shedding light on how people make economic decisions, sometimes rejecting rationality.
His research, the committee said, had taken the field of behavioural economics from the fringe to the mainstream of academic research and had shown that it had important implications for economic policy.
Professor Thaler said on Monday that the basic premise of his theories was that, “In order to do good economics you have to keep in mind that people are human.”
Asked how he would spend the prize money, he replied: “This is quite a funny question.” He added: “I will try to spend it as irrationally as possible.”
The economics prize was established in 1968 in memory of Alfred Nobel and is awarded by the Royal Swedish Academy of Sciences.
Mainstream economics for much of the 20th century was based on the assumption that people behaved rationally. Economists understood that this was not literally true, but they argued that it was close enough.
Professor Thaler has played a central role in pushing economists away from that assumption. He did not simply argue that humans are irrational, but also unhelpful. Rather, he showed that people depart from rationality in consistent ways, so their behaviour can still be anticipated.
For example, he showed that people do not regard all money as created equal. When gas prices decline, standard economic theory predicts that people will use the savings for whatever they need most. In reality, people still spend much of the money on gas. They buy premium gas even if it is bad for their car.
Professor Thaler also showed that people place a higher value on their own possessions. In a famous experiment, he and two co-authors distributed coffee mugs to half the students in a classroom and then opened a market in mugs. The students who had randomly been given a mug regarded it as being twice as valuable as did the students who were not given a mug. Professor Thaler named this phenomenon an “endowment effect”.
The importance of fairness is another key area of Professor Thaler’s research. He showed people care deeply about fairness and will penalise behaviour they regard as unfair even if they do not benefit by doing so. This has important economic implications. It explains, for example, why an umbrella store may not raise prices during a rainstorm.
It also illuminates the mechanics of economic recessions. Standard economic theory predicts that during an economic downturn, employers will cut wages to a level consistent with the demand for goods or services, so there is no reason to think a downturn will produce unemployment.
Why then does unemployment rise during downturns? Workers regard wage cuts as unfair. Employers, seeking to avoid angering the workers they keep, prefer to eliminate people rather than cutting the wages.
The Nobel committee described how Professor Thaler’s theory of “mental accounting” explained how people simplify financial decisions by focusing on the narrow impact of each decision rather than on its overall effect. Professor Thaler’s theories also shed light on why New Year’s resolutions can be hard to keep and on the tension between long-term planning and shortterm doing. Succumbing to shortterm temptation is an important reason many people fail in their plans to save for old age, or to make healthier lifestyle choices, according to Professor Thaler’s research. He also demonstrated how seemly small changes in how systems work, or “nudging” — a term he invented — could help people exercise better self-control when, for example, saving for a pension.