Thaler integrated Economics with Psychology

ECONOMICS NOBEL TO RICHARD H THALER

By Dr B K Mukhopadhyay

Richard H. Thaler, a Professor of Economics and Behavioural Science at the University of Chicago, won the 2017 Nobel Prize in Economic Sciences. The 72-year-old, who made a guest appearance in the 2015 credit crunch film The Big Short with Sele Gomez, has provided a “more realistic alysis of how people think and behave when making economic decisions.” 

Professor Richard H. Thaler

Born in New Jersey, Thaler graduated with a bachelor’s degree from the Case Western Reserve University in 1967. He received a master’s degree from the University of Rochester in 1970 and a doctorate in 1974, also from Rochester. Thaler joined the University of Chicago’s Booth School of Business in 1995.

University of Chicago’s Richard H. Thaler, one of the founders of behavioural economics and fince, was awarded the 2017 Nobel Prize in Economics for shedding light on how human weaknesses such as a lack of ratiolity and self-control can ultimately affect markets. The 72-year-old co-author of the 2008 best-seller Nudge has “built a bridge between the economic and psychological alyses of individual decision-making…... By exploring the consequences of limited ratiolity, 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  the Royal Swedish Academy of Sciences.

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 developed the theory of “mental accounting”, explaining how people make fincial decisions by creating separate accounts in their minds, focusing on the rrow impact rather than the overall effect.

His research on “fairness”, which showed how consumer concerns may stop firms from raising prices in periods of high demand, but not in times of rising costs, has also been influential, according to the Swedish academy. He shed light on how people succumb to short-term temptations, which is why many people fail to plan and save for old age.

Thaler’s body of work includes insights on the ways in which limited ratiolity, social preferences and a lack of self control affect decisions that shape market outcomes. His other works include Quasi-Ratiol Economics, The Winner’s Curse: Paradoxes and Anomalies of Economic Life and Advances in Behavioral Fince.

Thaler made a cameo appearance in the 2015 film The Big Short, sitting alongside actress Sele Gomez as they played blackjack.

He’s the director of the Center for Decision Research, and is the co-director, with now fellow Nobel laureate Robert Shiller, of the Behavioral Economics Project at the tiol Bureau of Economic Research.

The Latest

Thaler’s branch of economics has influenced Theresa May’s announcement of an “opt out” policy for organ dotions where it is presumed that people wish to dote body parts unless they state otherwise. The Department of Health has also adopted nudge principles in its approach to e-cigarettes. Incidentally, nudging stems from the field of behavioural economics, examining how gut instincts can often overrule ratiol choices.

The US academic, a professor at the University of Chicago, previously suggested that Brexit could be an example of behavioural economics in action - British voters chose an economically irratiol route when considering the options put to them by elites and the mainstream media. “Persolly I think a vote to leave is a highly risky move. Most voters aren’t really thinking about it in a very alytical way,”

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.

Unlike the field of classical economics [whereby decision-making is based on cold-headed logic]  behavioural economics allows for irratiol 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 fincial markets.

On his website, Thaler said he investigates the implication of “relaxing” the standard economic assumption that everyone is ratiol and selfish, “instead entertaining the possibility that some of the agents in the economy are sometimes human”.

Nudge theory (or nudge)

Nudge theory focusses on designing choices for people in a way that will encourage a particular decision. The theory assumes that people make mental short cuts and can be lazy in their decision making. By presenting choices in a certain way, people make ‘wiser’ decisions without losing their freedom of choice - the decision is still one’s, but one is being nudged one way or the other. Nudge theory comprises a truly hybrid approach to influencing human behavior, rooted in the disciplines of Behavioral Economics, Psychology and Political Theory. It is a concept in behavioural science, political theory and economics which propose positive reinforcement and indirect suggestions to try to achieve non-forced compliance to influence the motives, incentives and decision making of groups and individuals. The concept can be applied in miniature to individual situations, or more broadly to encompass the wider actions of a society or trends in fincial markets.

His Nudge theory, outlined along with former White House adviser Cass Sunstein, suggests small incentives can prod people into making certain decisions. His work has informed politicians looking for ways to influence voters and shape societies at a time when budget deficits limited their scope to spend. Former US President Barack Obama and former UK Prime Minister David Cameron both appointed teams to study if behavioural economics could be used to save their governments money.

He was an adviser on the creation of the “nudge unit” at the heart of Whitehall initiated as a pet project by David Cameron in the earliest days of his premiership from 2010 in the coalition government.The unit was initially focused on public health issues such as obesity, alcohol intake and organ dotion, although its scope has ballooned to cover everything from pensions and taxes to mobile phone theft and e-cigarettes. Formally called the Behavioural Insights Team, but widely known after Thaler’s book, the nudge unit is credited with encouraging 100,000 extra organ dotions a year and persuading 20% more people to consider changing energy provider.

But the Nudge theory has been criticised by some sections of the political right for being overly paterlistic, 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 irratiol actions and attempts to understand why this might be the case.

A recent House of Lords Review on the effectiveness of nudging concluded that nudges used in isolation will often not be effective in changing the behaviour of the population. Instead, a whole range of measures are needed to change behaviour in a way that will make a real difference. Today it is widely accepted that a nudge should be just one option in an arsel of behaviour change tools (including the not quite so stealthy ‘shove’ – more on that another time!).

Filly: On Demonetization

The Chicago Booth School of Business professor’s support for demonetisation last year.is well known by now. When India announced demonetisation last November, Nobel Prize winner Richard Thaler described it as a “policy I have long supported – the first step toward cashless and good start on reducing corruption,” but also remarked “damn” when it was brought to his notice that the government was introducing Rs 2,000 currency notes.

Dr Mukhopadhyay, a noted Magement Economist and an Intertiol Commentator on Business and Economic Affairs, can be located at m.bibhas@gmail.com