Nobel economics prize for man who made the subject ‘more human’
US economist Richard Thaler won the Nobel Prize for Economics yesterday for demonstrating that economic and financial decision-makers are not always rational, but mostly deeply human.
Bridging the gap between economics and psychology, Prof Thaler’s research focuses on behavioural economics, which explore the effect 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 Prof Thaler “a pioneer” on integrating economics and psychology.
“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 said.
“His empirical findings and theoretical insights have been instrumental in creating the rapidly expanding field of behavioural economics, which has had a profound impact on many areas of economic research and policy.”
His work earned him a foray into the movie business when he made a cameo appearance, alongside Christian Bale, Steve Carell and Ryan Gosling in the 2015 film The Big Short, about the credit and housing bubble collapse that led to the 2008 global financial crisis.
Prof Thaler said 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 won the 9 million kronor (Dh4.1m) prize.
Prof Thaler is 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, Prof 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 do not, which is called the endowment effect.
Influential in theoretical and experimental research on fairness, Prof 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.
Along with his colleagues, Prof Thaler created a tool called “the dictator game” that was used in several studies to measure the attitudes to fairness from people all over the world.
As for New Year’s resolutions, Prof Thaler showed that they 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 to live a healthier lifestyle.
“In his applied work, Prof 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.