U.S. economist Richard Thaler, whose pioneering work has integrated economics with psychology and who popularized the concept of “behavioral economics” in the best-selling book “Nudge,” has been awarded the Nobel Prize for economics.
According to the Nobel committee, the University of Chicago professor has expanded economic analysis by showing how three psychological traits — limited rationality, perceptions about fairness, and lack of self-control — influence economic decisions.
Behavioral economics has been applied in such areas as financial markets, where “behavioral finance” researchers have documented market volatility that seems incompatible with the theory of effective markets.
“In total, Richard Thaler’s contributions have built a bridge between the economic and psychological analyses of individual decision-making,” the committee said in a news release. “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.”
The U.K. and other governments have created “nudge units” to find innovative ways of changing public behavior and behavioral economics has been applied to everything from pensions and taxes to mobile phone theft and e-cigarettes.
In “Nudge,” Thaler and collaborator Cass Sunstein argued that behavioral economics could be applied to public policy, improving lives at little cost. “Professor Thaler’s academic work can be summarized as a long series of demonstrations that standard economic theories do not describe actual human behavior,” The New York Times said.
Thaler on Monday said the basic premise of his approach to economics was that, “In order to do good economics, you have to keep in mind that people are human.”
In his financial markets research, he showed that investors tend to prefer low-risk securities over short time horizons, but when they are presented with the potential results of various investments over a longer time horizon, they are more likely to choose higher risk securities, such as shares.
With Shlomo Benartzi, Thaler also devised the “Save More Tomorrow” program, which some U.S. companies have used to increase employee participation in pension plans.
Featured image: Chatham House, London, via Wikimedia Commons, CC BY 2.0