Nobel economics prize goes to American Richard Thaler for ‘making economics more human’

Picture taken on June 22, 2014 shows US economist Richard Thaler after he was awarded the 2014 Global Economy Prize during the award ceremony in Kiel, northern Germany.
US economist Richard Thaler on October 9, 2017 won the Nobel Economics Prize for
Picture taken on June 22, 2014 shows US economist Richard Thaler after he was awarded the 2014 Global Economy Prize during the award ceremony in Kiel, northern Germany. US economist Richard Thaler on October 9, 2017 won the Nobel Economics Prize for his pioneering work on the psychology of economics, the jury said. AFP

STOCKHOLM (AFP) - US economist Richard Thaler won the Nobel Economics prize on Monday (Oct 9) for showing that economic and financial decision-makers are not always rational, but mostly deeply human. 

Bridging the gap between economics and psychology, Thaler’s research focuses on behavioural economics which explores the impact of psychological and social factors on decisions by individuals or groups in the economy and financial markets. 

“He’s made economics more human,” the Nobel jury said, calling Thaler “a pioneer” on integrating economics and psychology.  “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,” the jury’s statement said. 

“His empirical findings and theoretical insights have been instrumental in creating the new and rapidly expanding field of behavioural economics, which has had a profound impact on many areas of economic research and policy.”

His work even earned him a glamorous foray into the movie business when he made a cameo appearance, alongside Christian Bale, Steve Carell and Ryan Gosling, in the 2015 movie “The Big Short” about the credit and housing bubble collapse that led to the 2008 global financial crisis. 

Thaler told the Nobel committee by videoconference he was “pleased” by the award.  “Well, I was pleased. I no longer will have to call my colleague Eugene Fama ‘Professor Fama’ on the golf course,” he joked, referring to his University of Chicago colleague who won the prize in 2013. 

“I think the most important recognition is that economic agents are human, and economic models have to incorporate that,” he said. 

The 72-year-old takes home the nine million kronor (944,000 euros, $1.1 million) prize sum. 

‘The dictator game’

Thaler is a professor at the University of Chicago – a school popular with the Nobel economics committee. Of 79 laureates so far, more than a third have been affiliated with the university’s school of economics. 

One of the founders of behavioural finance, which studies how cognitive limitations influence financial markets, Thaler developed a model for explaining how people tend to focus on the narrow impact rather than the overall effect of each decision they make, which is called limited rationality. 

This includes the study of how people’s loathing of losses can explain why they value the same things more when they own them as opposed to when they don’t, which is called the endowment effect. 

Influential in theoretical and experimental research on fairness, Thaler showed “how consumers’ fairness concerns may stop firms from raising prices in periods of high demand, but not in times of rising costs”, the Nobel economics committee said in a statement. 

Along with his colleagues, Thaler created a tool called “the dictator game” that was used in several studies to measure people’s attitudes to fairness from around the world. 

New Year’s resolutions

And what about keeping New Year’s resolutions?  Thaler has shown that they can be hard to keep – no matter how much people wish to fulfil them.  Using a planner-doer model, Thaler showed how short-term temptations disrupt people’s plans to save for their old age, rainy days or live a healthier lifestyle. 

“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,” the Nobel jury said. 

Fittingly, Thaler’s family name comes from the Germanic word for “dollar”.  Last year, the Nobel Economics Prize went to British-American economist Oliver Hart and Bengt Holmstrom of Finland for their research on contract theory, which has helped design insurance policies and executive pay. 

The economics prize is unique among the Nobel awards in that it was created by the Swedish central bank in 1968 – the others were all set up through the 1895 will of Swedish inventor and philanthropist Alfred Nobel. 

The award rounded off a week of prize announcements, including the literature prize to Kazuo Ishiguro, Britain's Japan-born author best known for "The Remains of the Day", and the peace prize to anti-nuclear campaigners ICAN, a coalition of NGOs.

Each Nobel prize consists of a gold medal, a diploma and a cheque for nine million kronor (S$1.5 million).