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Nobel in Economics Is Awarded to Richard Thaler Nobel in Economics Is Awarded to Richard Thaler
(35 minutes later)
WASHINGTON — Richard H. Thaler was awarded the Nobel Memorial Prize in Economic Science on Monday for his contributions to behavioral economics.WASHINGTON — Richard H. Thaler was awarded the Nobel Memorial Prize in Economic Science on Monday for his contributions to behavioral economics.
Professor Thaler, born in 1945 in East Orange, N.J., works at the University of Chicago’s Booth School of Business. The Nobel committee, announcing the award in Stockholm, said that he was a pioneer in applying psychology to economic behavior and in shedding light on how people make economic decisions, sometimes rejecting rationality.Professor Thaler, born in 1945 in East Orange, N.J., works at the University of Chicago’s Booth School of Business. The Nobel committee, announcing the award in Stockholm, said that he was a pioneer in applying psychology to economic behavior and in shedding light on how people make economic decisions, sometimes rejecting rationality.
His research, the committee said, had taken the field of behavioral economics from the fringe to the mainstream of academic research and had shown that it had important implications for economic policy.His research, the committee said, had taken the field of behavioral economics from the fringe to the mainstream of academic research and had shown that it had important implications for economic policy.
Professor Thaler said on Monday that the basic premise of his theories was that, “In order to do good economics you have to keep in mind that people are human.”Professor Thaler said on Monday that the basic premise of his theories was that, “In order to do good economics you have to keep in mind that people are human.”
Asked how he would spend the prize money, he replied: “This is quite a funny question.” He added: “I will try to spend it as irrationally as possible.”Asked how he would spend the prize money, he replied: “This is quite a funny question.” He added: “I will try to spend it as irrationally as possible.”
The economics prize was established in 1968 in memory of Alfred Nobel and is awarded by the Royal Swedish Academy of Sciences.The economics prize was established in 1968 in memory of Alfred Nobel and is awarded by the Royal Swedish Academy of Sciences.
Mainstream economics for much of the 20th century was based on the simplifying assumption that people behaved rationally. Economists understood that this was not literally true, but they argued that it was close enough.Mainstream economics for much of the 20th century was based on the simplifying assumption that people behaved rationally. Economists understood that this was not literally true, but they argued that it was close enough.
Professor Thaler played a central role in arguing that seemingly irrational behavior could not be ignored and that people are not rational even when they try to be. For example, when gas prices decline, classic economics teaches that people will use the savings for whatever they need most. In reality, people still spend on gas, either by buying more gas or by paying for premium gas — even if their cars don’t require premium gas. In other words, they treat a certain slice of their budget as gas money. Professor Thaler has played a central role in pushing economists away from that assumption. He did not simply argue that humans are irrational, which is obvious but also unhelpful. Rather, he showed that people depart from rationality in consistent ways, so their behavior can still be anticipated.
For example, he showed that people do not regard all money as created equal. When gas prices decline, standard economic theory predicts that people will use the savings for whatever they need most. In reality, people still spend much of the money on gas. They buy premium gas even if it is bad for their car. In other words: they treat a certain slice of their budget as gas money.
He also found that people care deeply about fairness. For example, an umbrella store might not raise prices during a rainstorm — or at least might not raise prices as high as it could — because it was aware that people may choose to get wet rather than reward a shop that they considered to be price gouging.He also found that people care deeply about fairness. For example, an umbrella store might not raise prices during a rainstorm — or at least might not raise prices as high as it could — because it was aware that people may choose to get wet rather than reward a shop that they considered to be price gouging.
The Nobel committee described how Professor Thaler’s theory of “mental accounting” explained how people simplify financial decisions by focusing on the narrow impact of each decision rather than on its overall effect. He also showed how aversion to losses can explain why people value the same item more highly when they own it than when they do not, a phenomenon called the endowment effect.The Nobel committee described how Professor Thaler’s theory of “mental accounting” explained how people simplify financial decisions by focusing on the narrow impact of each decision rather than on its overall effect. He also showed how aversion to losses can explain why people value the same item more highly when they own it than when they do not, a phenomenon called the endowment effect.
Professor Thaler’s theories also shed light on why New Year’s resolutions can be hard to keep and on the tension between long-term planning and short-term doing.Professor Thaler’s theories also shed light on why New Year’s resolutions can be hard to keep and on the tension between long-term planning and short-term doing.
Succumbing to short-term temptation is an important reason many people fail in their plans to save for old age, or make healthier lifestyle choices, according to Professor Thaler’s research. He also demonstrated how seemly small changes in how systems work, or “nudging” — a term he invented — could help people exercise better self-control when, for example, saving for a pension. Succumbing to short-term temptation is an important reason many people fail in their plans to save for old age, or to make healthier lifestyle choices, according to Professor Thaler’s research. He also demonstrated how seemly small changes in how systems work, or “nudging” — a term he invented — could help people exercise better self-control when, for example, saving for a pension.
Professor Thaler had a cameo appearance, alongside the actress and singer Selena Gomez, in the film “The Big Short,” in which he used behavioral economics to help explain the causes of the financial crisis. Asked about his “short Hollywood career,” he joked that he was disappointed his acting prowess had not been mentioned during the summary of his achievements when the award was announced.Professor Thaler had a cameo appearance, alongside the actress and singer Selena Gomez, in the film “The Big Short,” in which he used behavioral economics to help explain the causes of the financial crisis. Asked about his “short Hollywood career,” he joked that he was disappointed his acting prowess had not been mentioned during the summary of his achievements when the award was announced.
Mr. Thaler’s work has forced economists to grapple with the limits of traditional analysis based on the assumption that people are rational actors.Mr. Thaler’s work has forced economists to grapple with the limits of traditional analysis based on the assumption that people are rational actors.
He has also been unusually successful in directly influencing public policy.He has also been unusually successful in directly influencing public policy.
One of his most important contributions is his influence on the shift to retirement plans that automatically enroll employees, and to policies that offer employees the option of increasing their contributions over time. Both reflect Mr. Thaler’s insight that inertia can be used to shape beneficial outcomes without limiting human choice.One of his most important contributions is his influence on the shift to retirement plans that automatically enroll employees, and to policies that offer employees the option of increasing their contributions over time. Both reflect Mr. Thaler’s insight that inertia can be used to shape beneficial outcomes without limiting human choice.
In a 2008 book, “Nudge,” written with Cass Sunstein, Mr. Thaler argued governments had many opportunities to improve the design of public policy. In a 2008 book, “Nudge,” written with Cass R. Sunstein, Mr. Thaler argued governments had many opportunities to improve the design of public policy.
Two years later, the British government created a behavioral economics unit based on Mr. Thaler’s advice that pursued such opportunities. Other countries, including the United States, have followed suit. Some victories are relatively minor, such as sending letters with a picture of the car to people who have not paid auto registration fees, which has been found to increase the rate of payment. Others are more profound, like automatically enrolling eligible children in school meal programs. Two years later, the British government created a behavioral economics unit based on Mr. Thaler’s advice that pursued such opportunities. Other countries, including the United States, have followed suit. Some victories are relatively minor, such as sending to people who have not paid auto registration fees a letter with a picture of the car, which has been found to increase the rate of payment. Others are more profound, like automatically enrolling eligible children in school meal programs.
Cass R. Sunstein, a Harvard law professor who has long collaborated with Professor Thaler, jokingly described the honor as “unboundedly rational.” Mr. Sunstein, a Harvard law professor, jokingly described the honor for his longtime collaborator as “unboundedly rational.”
“Before Thaler, economics had been using the rational actor models, assuming that people make rational decisions about whether to buy drugs, how to invest, what jobs to take,” he said. “Thaler, more than anyone, systematically dismantled that assumption, not ever by saying that people are irrational. What he did was to say that people depart from rationality in predictable and systemic ways.”“Before Thaler, economics had been using the rational actor models, assuming that people make rational decisions about whether to buy drugs, how to invest, what jobs to take,” he said. “Thaler, more than anyone, systematically dismantled that assumption, not ever by saying that people are irrational. What he did was to say that people depart from rationality in predictable and systemic ways.”
He added that Professor Thaler had “disciplined the idea of animal spirits.”He added that Professor Thaler had “disciplined the idea of animal spirits.”
■ Jeffrey C. Hall, Michael Rosbash and Michael W. Young were awarded the Nobel Prize in Physiology or Medicine last Monday for discoveries about the molecular mechanisms controlling the body’s circadian rhythm.■ Jeffrey C. Hall, Michael Rosbash and Michael W. Young were awarded the Nobel Prize in Physiology or Medicine last Monday for discoveries about the molecular mechanisms controlling the body’s circadian rhythm.
■ Rainer Weiss, Kip Thorne and Barry Barish received the Nobel Prize in Physics on Tuesday for the discovery of ripples in space-time known as gravitational waves.■ Rainer Weiss, Kip Thorne and Barry Barish received the Nobel Prize in Physics on Tuesday for the discovery of ripples in space-time known as gravitational waves.
■ Jacques Dubochet, Joachim Frank and Richard Henderson were awarded the Nobel Prize in Chemistry on Wednesday for developing a new way to construct precise three-dimensional images of biological molecules.■ Jacques Dubochet, Joachim Frank and Richard Henderson were awarded the Nobel Prize in Chemistry on Wednesday for developing a new way to construct precise three-dimensional images of biological molecules.
■ The English novelist Kazuo Ishiguro, known for his spare, elliptical prose style and his inventive subversion of literary genres, was awarded the Nobel Prize in Literature on Thursday.■ The English novelist Kazuo Ishiguro, known for his spare, elliptical prose style and his inventive subversion of literary genres, was awarded the Nobel Prize in Literature on Thursday.
■ The Nobel Peace Prize was awarded on Friday to the International Campaign to Abolish Nuclear Weapons, a moment of vindication for the advocacy group responsible for the first treaty to prohibit such arms.■ The Nobel Peace Prize was awarded on Friday to the International Campaign to Abolish Nuclear Weapons, a moment of vindication for the advocacy group responsible for the first treaty to prohibit such arms.
■ Oliver Hart and Bengt Holmstrom were honored for their work on improving the design of contracts, the deals that bind together employers and their workers, or companies and their customers.■ Oliver Hart and Bengt Holmstrom were honored for their work on improving the design of contracts, the deals that bind together employers and their workers, or companies and their customers.