Richard Thaler Receives Nobel Memorial Prize in Economics
On the morning of Oct. 9, the Royal Swedish Academy of Sciences awarded the 2017 Sveriges Riksbank Prize in Economic Sciences in memory of Alfred Nobel to Dr. Richard Thaler for “his contributions to behavioral economics.”
“It woke me up,” said Dr. Thaler, jokingly, in an interview with Nobelprize.org, responding to a question about how he received the news of his award. “Yes, it’s good to see Sweden on your cell phone,” he added.
Dr. Thaler is a Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics at the Booth School of Business of the University of Chicago. In the past, among his numerous achievements, he has served as the President of the American Economics Association; authored numerous publications, including his famous book Nudge: Improving Decisions about Health, Wealth, and Happiness; and appeared in the movie The Big Short alongside Selena Gomez, explaining one of the main causes of the 2008 financial crisis. His main research activities focus on “behavioral economics and finance; the psychology of decision making,” faculty website.
His most recent accolade, the Nobel Memorial Prize in Economics, is indicative of the recent rise in behavioral economics, which incorporates psychology into the field to understand how humans actually make decisions. Rather than supporting traditional economic thinking, which assumes that economic agents are fully rational and utility-maximizing, Dr. Thaler is a proponent of understanding the irrationalities of human beings, how individuals systematically deviate from what is rational.
“Behavioral economics tries to understand and experimentally identify any anomalies or deviations from people’s rational behaviors,” said Professor Alexey Kushnir, Assistant Professor of Economics at the Tepper School of Business, in an interview with The Tartan. “Standard economics thinks that people are completely rational — they behave like computers, perfectly predict all their moves in the game of chess and win, or they can calculate infinitely many rounds.”
According to Prof. Kushnir, Dr. Thaler’s research, which ran numerous experiments, contributed to four main areas of behavioral economics: limited or bounded rationality, people’s perceptions of fairness, self-control, and social preferences.
“[Dr. Thaler] explained why people pooled money in different accounts, in saving accounts towards buying a house, a holiday, or towards any big project... They sometimes, while having money in these accounts, accumulate a lot of debt, and they don’t pay this debt with money from these accounts,” Prof. Kushnir pointed out, providing an example of the concept of limited rationality. “This does not sound rational. But, from another point of view, it allows many people to accumulate money because people are not perfectly rational without any behavioral biases.”
Regarding fairness, Prof. Kushnir commented that Dr. Thaler’s research confirmed that people “care about the welfare of others” and how people were less inclined to behave in a way that caused harm, even if profits were involved.
As for social preferences, Prof. Kushnir cited an example from Nudge: Improving Decisions about Health, Wealth, and Happiness in which an experiment found that simply including a picture of a person’s car in a tax-collection letter significantly increased tax-collection rates. “I always like to see where some theoretical models lead to practical implications,” Prof. Kushnir said. “For the government to create a behavioral economics unit that changes little [things], like the letter to the taxpayers and increases tax collection size... it is really cheap for its good benefits.”
For this reason and for his insightful research in these areas, Dr. Thaler is often given the title of the ‘Father of Behavioral Economics.’ His Nobel Memorial Prize attests to the fact that behavioral economics has come far, gaining greater ground in the field every year.
“Economists don’t do a lot of embracing, actually,” said Dr. Thaler at a press conference on Oct. 9 at the Booth School of Business. “I don’t think I’ve changed anybody’s mind in 40 years… So, given that, I’ve used the strategy of corrupting the youth, whose minds are not already made up... I think many great young economists have embraced behavioral economics.”
While the Nobel Memorial Prize this year has shown the prominence of behavioral economics as a field of study, many say there is still much more to be done.
“What does it mean for the future? I’m not sure, honestly, because the Nobel prize is devoted [to] the past achievements,” said Prof. Kushnir about the future of economics. “We already know how the deviations of rationality [occur] in several directions, and they were discovered in the late 1990s and [early] 21st century. But now, since there have been so many anomalies that have been discovered, we need to create a unified theory, and it’s hard.”
Nevertheless, Dr. Thaler’s research has inspired many economists, scholars, and even governments to consider the limited rationality of individuals.
“[Dr. Thaler] has really wanted to show that the human factor has a real influence on economic decisions,” said Peter Gärdenfors, a member of the Swedish Royal Academy of Sciences, in an interview immediately following the announcement of the award. “In short summary, he has made economics more human.”