Master of the irrational wins Nobel economics prize

University of Chicago’s Richard Thaler, one of the founders of behavioural economics and finance, was awarded the 2017 Nobel Prize in Economics for shedding light on how human weaknesses such as a lack of rationality and self-control can ultimately affect markets.

The 72-year-old, 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.

“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,” the academy said.

His ‘Nudge’ theory, outlined along with former White House adviser Cass Sunstein, 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 ex-UK prime minister David Cameron both appointed teams to study if behavioural economics could be used to save their governments money.

On a call with journalists after the announcement, Mr 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”.

Mr Thaler also made a cameo appearance in the 2015 film The Big Short, sitting alongside the actress Selena Gomez as they played blackjack.

Asked about the hot-hand fallacy in relation to President Donald Trump, Mr Thaler said he was disappointed his film career wasn’t part of the “official” announcement, adding that Mr Trump “would do well to watch that movie”.

Mr 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.

Mr Thaler’s body of work includes insights on the ways in which limited rationality, social preferences and a lack of self-control affect decisions that shape market outcomes.

He has studied how American football teams make poor choices when drafting players and how quiz show contestants take risks.

Mr Thaler joined the University of Chicago’s Booth School of Business in 1995. He that he will try to spend the money “as irrationally as possible”.

Bloomberg