13/10/2017 217 Economic Affairs | Growth and development | View Recent Current Affairs
- University of Chicago academic Richard Thaler was awarded the Nobel Prize for economics.
- He is pioneer in behavioural economics and has built a bridge between economics and psychology to show a more realistic analysis of how people think and behave when making economic decisions.
- Behavioural economics looks at the impacts of social, psychological and emotional factors in making decisions about money that aren’t in a person’s best interest. It’s kind of the opposite of the rational decision makers that are usually described in economic theory.
- Thaler’s research has expanded economic analysis by considering three psychological traits: limited rationality, perceptions about fairness and lack of self-control.
About his contribution:
- 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.
- His “nudge” theory 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.
- For example, writing to People to inform them that most people in their town had already paid their taxes was found to speed up payments. People were also found to be more likely to insulate their attics if they were offered help clearing them.
- Thaler developed the theory of “mental accounting”, explaining how people make financial decisions by creating separate accounts in their minds, focusing on the narrow 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.