Thaler nudges his way to Nobel economics nod

Behavioural economist, Professor Richard Thaler of the University of Chicago has won the 2017 Nobel Prize for economics. Famous for the ‘Nudge’ concept in economics, Thaler was awarded the prize for explaining the manner in which people make decisions by concentrating on narrow effects rather than overall impacts of their decisions. This can have serious implications for markets, because at its essence, Thaler’s work gives rise to the understanding that irrationality drives much decision-making.

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Thaler has coined more terms than ‘nudgonomics’. He described the concept of ‘mental accounting’ which sees people justify decisions by creating separate accounts in their minds. He also researched how concerns about ‘fairness’ can stop firms from raising prices, even though the economic fundamentals are in place for them to do so.

He is renowned for the ‘hot hand theory’, which suggests that like a gambler on a streak, those who have had a winning run expect the same outcome, despite the ever-changing conditions.

Like some before him, Professor Thaler’s work has been influential in driving public policy formations. His treatise, ‘Nudge’ on how public analysis of behavior can change public policy saw governments in several countries establish behavioural economics units. One example of how ‘nudge’ economics works seems unremarkable – but that is the advantage of hindsight. The Australian Financial Review reported that using Thaler’s models:

“The British government found that people were more likely to pay automobile registration fees if the billing letters included a picture of the vehicle and a reminder that unregistered cars could be seized. Other measures, like automatic enrolment in savings programs or in school lunch programs, have had far-reaching benefits.”

Thaler’s award was less controversial than say Robert Zimerman’s (Bob Dylan’s) in 2016, for literature, but it has not come without its critics. In the main, these have been theoretical criticisms rather than outright rejections.

Also writing in the Australian Financial Review, Chris Berg and Sinclair Davidson posit their caution that economists do not have a mortgage on truth or on behavioural analysis. A good point, and they go on to say that concepts of irrationality are important to comprehend because as much as traditional economics loves to assume rationality, it has done so because it did not have tools to measure and model irrationality. That is also a good point and one with which Professor Thaler would likely agree.

Berg and Davidson go a little further when they take aim at nudge theory, in part because they see it as quite complex for governments to make the right nudges, to elicit the preferred actions. That is also probably reasonable in many situations, but at days end, we have to turn back to the examples like the one above. 

It is the fact that theories of behavioural analysis apply to economic decision making and can be modeled to assist in determining public policy (and business level actions) that sees Professor Thaler being the Nobel laureate for economics for 2017.