The Nobel prize in economics has been awarded to Richard Thaler of the University of Chicago for research showing how people’s choices on economic matters — whether on savings or game shows like Deal or No Deal — are not always rational.
The 9 million kronor (US$1.1 million) prize was awarded to the academic for his “understanding the psychology of economics,” Swedish Academy of Sciences secretary Goran Hansson said yesterday.
Thaler is considered one of the founding fathers of behavioral economics, a field that shows that far from being the rational decision-makers described in economic theory, people often make choices that do not serve their best interests.
Photo: AFP / University of Chicago / Anne Ryan
That could include, for example, refusing to cut their losses when their investments plunge in value or making big bets at the casino because they are convinced their hot streak will continue.
The illogical behavior has economic consequences: People do not save enough for retirement. They make investments — in houses in the mid-2000s, for instance — when prices are already dangerously high.
The Nobel committee said Thaler has provided a “more realistic analysis of how people think and behave when making economic decisions.”
Speaking by telephone to a news conference immediately after he was announced as the prize winner, Thaler said the most important impact of his work is “the recognition that economic agents are humans.”
In 2008, Thaler cowrote a paper examining the choices contestants face in games such as the TV showDeal or No Deal, including about how early outcomes affect decisions later in the game. In the paper, Thaler and the authors found that contestants become bolder in their choices when their initial expectations of how much they would win are shattered, whether by big losses or big gains.
Thaler told the news conference that he would likely use the prize money in ways consistent with his research.
“I will say that I will try to spend it as irrationally as possible,” he said.
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