Nobel Prize for Contribution to Behavioral Economics

The 2017 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was awarded to American economist Richard H. Thaler from University of Chicago “for his contributions to behavioral economics”.

Thaler, 72, has incorporated psychologically realistic assumptions into analyses of economic decision-making. 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, according to Bobelprize.org.

  Limited Rationality

Thaler 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.

He 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 those who founded the field of behavioral finance, which studies how cognitive limitations influence financial markets.

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.

  Lack of Self-Control

Thaler has also shed new light on the old observation that New Year’s resolutions can be hard to keep. He showed how to analyze 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.

Succumbing to short-term 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, 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.