Nobel laureate 'nudges' people to make better decisions

Professor Richard Thaler was the subject of many a "wefie" at a University of Chicago reception after learning he had been awarded the 2017 Nobel prize in economics on Monday. Prof Thaler is one of the founders of the "nudge theory" which stems from
Professor Richard Thaler was the subject of many a "wefie" at a University of Chicago reception after learning he had been awarded the 2017 Nobel prize in economics on Monday. Prof Thaler is one of the founders of the "nudge theory" which stems from behavioural economics - the idea that you can use subtle nudges to encourage people to make better decisions.PHOTO: AGENCE FRANCE-PRESSE
Professor Richard Thaler was the subject of many a "wefie" at a University of Chicago reception after learning he had been awarded the 2017 Nobel prize in economics on Monday. Prof Thaler is one of the founders of the "nudge theory" which stems from
Prof Thaler had a cameo appearance with Selena Gomez in the film The Big Short.PHOTO: AGENCE FRANCE-PRESSE

Professor Richard Thaler of the University of Chicago won the 2017 Nobel prize in economics this week for his pioneering and influential work in behavioural economics. Ann Williams gives a quick glimpse into Prof Thaler's work:

WE'RE ONLY HUMAN

Although it seems an obvious truth, Professor Richard Thaler's work showed how people don't always behave rationally when making economic decisions.

Unlike classical economists, who see people making economic decisions based on clear-eyed logic, behavioural economists allow for irrational behaviour and study how human flaws like lack of self-control and fear of losing can push people towards decisions that don't actually benefit them economically.

This theory can be applied in microcosm to individual behaviour, but also very broadly to society or financial markets.

For example, Prof Thaler looked at the shock vote for Brexit - Britain's decision to exit the European Union - and suggested that behavioural economics could explain the vote. When it came to the crunch, many people went with their gut instincts instead of making a clear, rational choice.

NUDGE, NUDGE

Prof Thaler is also one of the founders of the "nudge theory" which stems from behavioural economics - the idea that you can use subtle nudges to encourage people to make better decisions.

In 2008, he co-wrote the global best-selling book Nudge: Improving Decisions About Health, Wealth And Happiness with fellow American professor Cass Sunstein.

The book influenced policymakers around the world as it explained things like how you could get people to eat more healthy foods simply by placing them at eye level on supermarket shelves, or get them to donate their organs or save for retirement by automatically enrolling them in plans with opt-out clauses.

Prof Thaler says his favourite example of a nudge was how Amsterdam's Schiphol Airport slashed cleaning costs for its urinals by etching images of flies on them, giving men something to aim at. This strategy was copied in urinals around the world.

SELENA GOMEZ & HOT HAND

Prof Thaler had a cameo appearance with pop star Selena Gomez in the film The Big Short.

The 2015 Oscar-nominated movie was based on Michael Lewis' best-selling book of the same name. It follows the lives of some real people just before and during the 2008 financial crisis that saw the build-up and subsequent collapse of the US housing market spread into a global credit bubble that also burst.

In a scene where Gomez plays blackjack, Prof Thaler uses the psychological fallacy of a "hot hand" to explain the rise of the "synthetic CDO", a collateralised debt obligation and complex financial tool.

It explains how increasingly larger side bets on Gomez's hand of blackjack are great when she is winning - a metaphor for a rising housing market.

However, when Gomez loses the hand - or the housing market falls - those increasingly larger side bets set off a domino effect with larger losses at the table equating to the fallout spreading to the financial market and economy.

SOURCE: THE GUARDIAN, SLATE MAGAZINE

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A version of this article appeared in the print edition of The Straits Times on October 11, 2017, with the headline 'Nobel laureate 'nudges' people to make better decisions'. Print Edition | Subscribe