A Nobel nudge

Award for Professor Richard Thaler.

10 November 2017

This year’s Nobel Prize in Economics has been awarded to a man who brought the ‘nudge’ into popular parlance and bridged the gap between psychology and the economy. Behavioural economist Professor Richard Thaler (University of Chicago) dubbed the ‘father of behavioural economics’ has spent his career encouraging economists to accept that humans are irrational – but predictably so.

Also author of two bestselling books, Misbehaving: The Making of Behavioral Economics and Nudge: Improving Decisions About Health, Wealth and Happiness, Thaler has challenged the standard economic assumption that people operating within the economy are rational and selfish. As he told National Public Radio last year, many economic models assume people are rational, unemotional and self-controlled, but people behave in ways that defy economic logic; however, there are patterns to their irrationality: ‘I believe that for the last 50 or 60 years, economists have devoted themselves to studying fictional creatures… They might as well be studying unicorns.’

Thaler has helped explain, through theories of limited rationality, 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 has also shown that our human aversion to loss means people value the same item more highly when they own it compared to when they don’t – a phenomenon called the endowment effect.

His theoretical and experimental research on fairness has also been influential. Thaler showed how consumers’ fairness concerns may stop firms from raising prices in periods of high demand, but not in times of rising costs. He 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 has also shed new light on self-control – or our lack of it. He showed how to analyse self-control problems using a planner-doer model, similar to the frameworks psychologists and neuroscientists use to describe the internal tension between long-term planning and short-term doing. Giving in to temptation in the short term is one of the reasons our long-term goals fail; however, Thaler has also shown in his applied work that nudge techniques can improve self-control in situations where we plan for the long term.

And how is Thaler planning to spend the nine million Swedish kronor prize money? ‘As irrationally as possible,’ he said.