US economist Richard Thaler was conferred 2017 Nobel prize for his work in “understanding the psychology of economics”.
Till recently econominsts’ assumption of any economic theory was that humans are rational actors who maximise their utility. But over the past few decades, behavioural economists like Richard Thaler have progressively chipped away at this notion. They combine economics with insights from psychology to show how heavily economic decisions are influenced by cognitive biases.
His research has touched on subjects as varied as asset prices, personal savings and property crime. For example, Mr Thaler developed a theory of mental accounting, which explains how people making financial decisions look only at the narrow effect of individual decisions rather than the whole effect.
One of the founding fathers of “nudge” theory, which has helped boost British tax receipts and encouraged smokers to become vapers, has been awarded the 2017 Nobel prize for economics.
Richard Thaler co-wrote a bestselling book on the nudge concept read by politicians around the world and soon had them embracing the notion that people can be influenced by prompts – such as changing the wording of tax demands – to alter their behaviour.
Nudging stems from the field of behavioural economics, examining how gut instincts can often overrule rational choices, in which Thaler is regarded as a pioneer.
Thaler co-wrote the global bestselling book Nudge: Improving Decisions about Health, Wealth, and Happiness in 2008 with the US professor Cass Sunstein, which brought the theory to wider attention.
Thaler is a leading voice on how nudging can tackle problems in society, although retailers often employ behavioural economics to encourage greater sales by making small changes to alter the buying habits of consumers.
Nudge theory has been criticised by some sections of the political right for being overly paternalistic, while it has also been described as a neoliberal idea by the left because it relies on individual choice instead of overt state intervention. Unlike the field of classical economics – whereby decision-making is based on cold-headed logic – behavioural economics allows for irrational actions and attempts to understand why this might be the case. The concept can be applied in miniature to individual situations, or more broadly to encompass the wider actions of a society or trends in financial markets.
Thaler becomes the latest American economist to win a prize increasingly dominated by US citizens, now accounting for roughly half of laureates since the inception of the Nobel prize in economic sciences in 1968.
