Richard Thaler : What You Need to Know About The Nobel Prize Winner's Efforts in Economics
Richard Thaler won the Royal Swedish Academy of Science’s 2017 Nobel Memorial Prize in Economics on Oct 9. for his efforts in pioneering behavioral economics.
Behavioral economics is a field that combines the psychology behind human choices with economic theories to produce more realistic models of decision-making.
Mainstream economists assume that people behave rationally. However, Thaler argued the obvious fact that humans are actually irrational and proved that humans are consistent in their irrationality, allowing anticipation and modeling of their behavior.
The Nobel Prize winner who hails from East Orange, N.J., has influenced people to behave in better and healthier ways through “nudges” rather than coercion. This idea was outlined in the 2008 best-selling book, Nudge, that he co-wrote with Harvard law professor Cass Sunstein.
According to Sunstein, there is not “an economist alive who’s had as large an impact on the economics profession and the world as Thaler.”
Thaler, an economist at the University of Chicago’s Booth School of Business, has used his research to help drive improvements in public policy. A prominent example of the changes that he has made is a shift toward automatic enrollment of workers in retirement savings and benefits programs. Research findings have shown that this switch has increased program participation, strengthening Thaler’s argument that people prefer the status quo and are less likely to leave the program if they are already in it.
“In order to do good economics, you have to keep in mind that people are human,” Professor Thaler said at a news conference after the announcement.
Thaler has also discussed the importance of fairness and its economic implications. People are likely to penalize behavior they find unfair, regardless of whether or not they benefit from doing so. For example, because employees regard wage cuts as unfair, businesses are more likely to fire people than cut wages in order to avoid uproar among their workers.
A third significant finding of Thaler is the idea that people more highly value items that they own. He, along with two other economists, conducted a famous classroom experiment in which half of the students were given a mug and half were not. Those who received a mug valued it twice as much as those who did not receive one. This concept has been labeled the “endowment effect,” and can be demonstrated in a variety of situations.