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Thaler, 72 and a professor at the University of Chicago, is one of the founders of behavioral economics and finance, a field which once drew derision from some academics before entering the mainstream over the past decade. He was made a Nobel laureate for shedding light on how human weaknesses such as a lack of rationality and self-control can ultimately affect markets.
The co-author of the 2008 best-seller “Nudge” has “built a bridge between the economic and psychological analyses of individual decision-making,” the Royal Swedish Academy of Sciences said in a statement.
Thaler’s “Nudge” theory, crafted with former White House adviser Cass Sunstein, suggests small incentives can prod people into making certain decisions. The work has informed politicians looking for ways to influence voters and shape societies at a time when budget deficits limited their scope to spend and the 2008 financial crisis caught many economists off guard.
Former U.S. President Barack Obama and ex-U.K. Prime Minister David Cameron both appointed teams to study if behavioral economics could be used to save their governments money and drive economies. Behavioral policy making is now spreading through the world, from Singapore to Australia.
“From studying human beings rather than using abstract models you get better policies, better answers for paying taxes, donating organs, getting people back to work,” said David Halpern, chief executive officer of the London-based Behavioural Insights Team, which was partly inspired by Thaler’s ideas and has worked with the academic. “We’ve still got a long way to go. There are so many policies which involve human behavior.”
On a call with journalists after the announcement, Thaler said the most important impact of his research is “the recognition that economic agents are human, and that economic models have to incorporate that.”
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 revealed how people succumb to short-term temptations, which is why many people fail to plan and save for old age.