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Economics

Richard Thaler, famed for ‘nudge’ theory, wins Nobel economics prize

Richard F. Thaler

University of Chicago professor Richard H. Thaler was awarded the 2017 Nobel Memorial Prize in Economic Sciences on Monday "for his contributions to behavioral economics," the Royal Swedish Academy of Sciences announced in a news release.

Mr. Thaler, a Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics professor in the Chicago Booth School of Business, was given the award for developing theories integrating economics with psychology.

"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 in the news release.

Among the theories the academy cited were the theory of mental accounting, how people narrowly focus on the impacts of each individual decision rather than their overall effects, as well as how the concerns by consumers on fairness sometimes prevents firms from raising prices except during periods of rising costs.

"As Thaler's research confirms, investors can be anything but rational," said Bruce Jacobs, principal at Jacobs Levy Equity Management, in an email. "He documents the many mental shortcuts humans take when confronted with more information than can be processed quickly. These shortcuts can explain why stock prices reflect investor fads and herd instincts rather than cool calculation, leading to phenomena such as momentum bubbles and subsequent crashes."

"Unlike the hard sciences, financial economics is not dominated by immutable laws of nature," Mr. Jacobs said. "Models that assume investors always act rationally can be blindsided by irrational markets because they fail to account for investor biases. Modeling can be improved by incorporating a more nuanced view of human behavior."

Mr. Thaler's "nudge" theory, outlined in the 2008 best seller "Nudge" co-authored 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 U.S. President Barack Obama and ex-U.K. Prime Minister David Cameron both appointed teams to study whether behavioral economics could be used to save their governments money.

For example, writing to Britons to inform them that most people in their town had already paid their taxes was found to speed up payments.

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 on the call that he was disappointed his film career wasn't part of the "official" announcement, adding that Mr. Trump "would do well to watch that movie."

The academy has posted both popular science background and science background on Mr. Thaler's award on its website. Mr. Thaler could not be immediately reached to comment.

Bloomberg contributed to this story.