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2017-10-10 05:58:31
Richard Thaler becomes one of very few behavioural economists to receive the
discipline s highest honour
NOT long ago, the starting assumption of any economic theory was that humans
are rational actors who maximise their utility. Economists summarily dismissed
anyone insisting otherwise. But over the past few decades, behavioural
economists like Richard Thaler have progressively chipped away at this notion.
They combine economics with insights from psychology to show how heavily
economic decisions are influenced by cognitive biases. On October 9th Mr Thaler
s work was recognised at the highest level when the Nobel Committee awarded
him this year s prize in economics. Mr Thaler thus becomes one of very few
behavioural economists to win the prize.
Mr Thaler s has been a prolific career, spanning over four decades, the last
two of them at the University of Chicago s Booth School of Business. His
research has touched on subjects as varied as asset prices, personal savings
and property crime. For example, Mr Thaler developed a theory of mental
accounting, which explains how people making financial decisions look only at
the narrow effect of individual decisions rather than the whole effect.
(Indeed, he is one of the founders of the sub-discipline of behavioural
finance.) The Nobel committee also highlighted Mr Thaler s research on
self-control, that is, the tension between long-term planning and short-term
temptations.
The new laureate has also worked to bring his arguments to a wider audience.
For the benefit of fellow economists not well versed in (or dismissive of)
behavioural theories, he wrote a regular column for the Journal of Economic
Perspectives, a prestigious journal, recounting instances of economic behaviour
that violated classical microeconomic theory. For a general audience, he wrote
several books on behavioural economics, starting with Quasi-Rational Economics
in 1991.
But Mr Thaler is perhaps most famous as a pioneer of nudging : the use of
behavioural insights as a public-policy tool. Although the idea of nudging is
not new, and firms have long employed behavioural science to shape their
customers behaviour, governments of the past used psychology only
sporadically.
That started to change when Mr Thaler and Cass Sunstein, a legal scholar at
Harvard University, co-authored a book, Nudge , in 2008. The book attacked the
assumption of rational decision-making in economic models and showed how
context could be changed to nudge people to make better choices. In 2010 Mr
Thaler advised the British government on the creation of the Behavioural
Insights Team, a unit that sought to put their ideas into practice. The wildly
successful government unit has since been spun out into a quasi-private company
and now advises governments around the world.
From a renegade offshoot within economics departments just a few decades ago,
behavioural economics has gained an established place not only within academia,
but also within government departments around the world. From Australia to
America, as well as within organisations like the World Bank and UN, the
nudging approach has been copied. The Nobel Committee s decision to honour Mr
Thaler is of course a recognition of his personal achievements. But it is also
a testament to the newfound importance of his discipline.
Correction (October 10th 2017): An earlier version of this article misstated
the date on which Mr Thaler was awarded his prize.