{"id":10175,"date":"2017-10-09T01:02:20","date_gmt":"2017-10-09T01:02:20","guid":{"rendered":"http:\/\/www.lifeandnews.com\/articles\/?p=10175"},"modified":"2017-10-10T01:06:10","modified_gmt":"2017-10-10T01:06:10","slug":"economist-who-helped-behavioral-nudges-go-mainstream-wins-nobel","status":"publish","type":"post","link":"https:\/\/www.lifeandnews.com\/articles\/economist-who-helped-behavioral-nudges-go-mainstream-wins-nobel\/","title":{"rendered":"Economist who helped behavioral ‘nudges’ go mainstream wins Nobel"},"content":{"rendered":"

Jay L. Zagorsky<\/a>, The Ohio State University<\/a><\/em><\/span><\/p>\n

The 2017 Nobel Prize in economics<\/a> was awarded to University of Chicago\u2019s Richard Thaler<\/a> for his work in behavioral economics<\/a>, which is the integration of economics with psychology. <\/p>\n

While the award was not a total surprise, since Thaler\u2019s name was floated earlier on the list of potential winners<\/a>, it highlights the growing importance of incorporating how humans actually behave into economic thinking. It marks the second time a pioneer in the burgeoning field of behavioral economics \u2013 which hardly existed a few decades ago \u2013 has won a Nobel, the first being psychologist Daniel Kahneman<\/a> in 2002. <\/p>\n

It may be hard to believe, but before these scholars came along, many economists assumed that humans acted like Spock<\/a> on \u201cStar Trek.\u201d People were supposed to be perfectly rational calculating machines that looked at all the information and made correct choices. However, even a most casual view of the real world suggests this is not a good assumption.<\/p>\n

So who is Thaler and what\u2019s so important about his work?<\/p>\n

\n \"\"
\n Before Thaler and his peers came along, economists assumed people behaved a lot like Spock.<\/span>
\n AP Photo\/Bob Galbraith<\/span><\/span>
\n <\/figcaption><\/figure>\n

Thaler\u2019s impact<\/h2>\n

Richard Thaler<\/a> was born in 1945 in East Orange, New Jersey. He studied at Case Western and the University of Rochester, where he earned a Ph.D. in economics in 1974. <\/p>\n

His doctoral thesis offered one of the earliest estimates of the value of saving a life<\/a>, calculations that governments<\/a> and businesses use to determine how much they should spend to prevent fatalities. For example, when the government is considering new air quality regulations that will cost companies money, it compares the price tag against the value of lives saved if the changes are implemented. <\/p>\n

Thaler estimated that a life saved was worth about US$200,000<\/a> in 1967 dollars, or about $1.5 million<\/a> in 2017 terms. Today, government agencies value a life five to six times higher<\/a> than that. <\/p>\n

Thaler may be best-known for the bestselling book \u201cNudge<\/a>,\u201d which he co-wrote with Harvard law professor Cass Sunstein. \u201cNudge\u201d is credited with inspiring former Prime Minster David Cameron to create the U.K.\u2018s Behavioral Insights Team<\/a>, which uses psychological principles to improve the effectiveness of public services. Former President Barack Obama set up a similar group<\/a> in the White House.<\/p>\n

Thaler and Sunstein argue people should not be forced to do things with bans or laws. Instead, small interventions, or nudges, that make the right choice easier are the best way to go. They offer examples such as putting healthy food where people can see and reach it easily while relegating unhealthy options to out-of-the-way spots. Since people usually make the easy choice, moving food around will result in less junk food being eaten.<\/p>\n

Another example is making automatic retirement contributions the default choice<\/a> when someone begins a new job. This means new employees will have to fill out paperwork to stop contributions instead of to start them. As a result, more people save for retirement.<\/p>\n

More specifically, the Royal Swedish Academy of Sciences selected Thaler for his work in three areas<\/a>: \u201climited rationality,\u201d \u201csocial preferences\u201d and \u201clack of self-control.\u201d<\/p>\n

\n \"\"
\n Thaler and Sunstein showed how making healthier options more visible makes it more likely people will choose them.<\/span>
\n AP Photo\/Hans Pennink<\/span><\/span>
\n <\/figcaption><\/figure>\n

Limits of our reason<\/h2>\n

Thaler pointed out that because people often can\u2019t solve many problems in their economic lives, they simplify and use rules of thumb. These simplifications, however, lead to strange and sometimes bad choices.<\/p>\n

Mental accounting<\/a> is one area of strange choices that Thaler was the first to identify. Because our financial lives are complex, we mentally put money in separate buckets and spend only the money available in that bucket. <\/p>\n

For example, Thaler describes a couple<\/a> who receives $300 in cash compensation from an airline for lost baggage. The couple takes the $300 and spends it on a fancy dinner. They splurged for the dinner only because, in their heads, they classified $300 as a windfall. But if their salaries had simply increased by a total of $300, they would likely not have splurged on eating out but instead mentally classified the extra money as spending for rent and other bills.<\/p>\n

Adding emotion to economics<\/h2>\n

He also won the Nobel for his work on social preferences and fairness. <\/p>\n

Thaler, with co-authors Kahneman and Canadian economist Jack Knetsch<\/a>, showed in 1986 how customers don\u2019t expect companies to maximize profits in all situations. For example, when there\u2019s a blizzard, people don\u2019t expect stores to raise the price of shovels, even though demand will naturally soar as the snow piles up. Thaler and his co-authors showed that customers will tend to punish businesses that do. This is a surprising result since it shows that businesses that maximize profits<\/a> in the short term, as many do, can be penalized in the long term if customers think the companies are acting unfairly.<\/p>\n

This work has relevance today for understanding consumers\u2019 reactions to drug companies pushing prescription drug prices ever higher<\/a> and to businesses price-gouging<\/a> after hurricanes. Thaler points out that emotions<\/a>, like feelings about fairness, are an important but overlooked area of economics.<\/p>\n

\n \"\"
\n Daniel Kahneman makes a toast with his wife Anne Treisman after winning the Nobel Prize in economics.<\/span>
\n AP Photo\/Daniel Hulshizer<\/span><\/span>
\n <\/figcaption><\/figure>\n

Paying for self-control<\/h2>\n

A third area cited by the Swedish Academy was the contribution Thaler and economist Hersh Shefrin made on ideas about self-control<\/a>.<\/p>\n

The economists noted that people spend money to avoid making poor choices or to avoid engaging in the wrong kinds of behaviors. For example, Thaler and Shefrin wrote that people \u201cpay to go to \u2018fat farms<\/a>\u2019 which essentially are resorts that promise not to feed their customers.\u201d<\/p>\n

Individuals not only pay for self-control but also create special rules to ensure they don\u2019t go beyond self-imposed limits. Smokers, for instance, often buy cigarettes by the pack instead of by the carton. This ensures they smoke less each day, even though they pay more per cigarette. <\/p>\n

Thaler\u2019s work on self-control is becoming more important as the internet and almost instant delivery make more of the world\u2019s temptations easier to access<\/a> without waiting. Understanding how people actually operate results in better public policies that can achieve the same results without costing people money.<\/p>\n

\n \"\"
\n Even though regular smokers would save money by buying cigarettes by the carton, many purchase one pack at a time as a means of self-control.<\/span>
\n AP Photo\/Ed Wray<\/span><\/span>
\n <\/figcaption><\/figure>\n

It\u2019s all about us<\/h2>\n

The award is worth 9 million Swedish kronor<\/a>, which at today\u2019s exchange rate is about $1.1 million. Unfortunately for Thaler, since he is an American, the entire award is taxable<\/a> income \u2013 unless it is donated to a charity.<\/p>\n

Asked how he would spend the money<\/a>, he said: \u201cThis is quite a funny question\u2026 I will try to spend it as irrationally as possible.\u201d<\/p>\n

The Nobel Memorial Prize in Economic Science, the only award not created by Alfred Nobel in his will<\/a>, also brings enormous prestige to the winner. Economist Friedrich Hayek, who won the prize in 1974, said it confers<\/a> on an individual an \u201cinfluence over laymen: politicians, journalists, civil servants and the public generally.\u201d<\/p>\n

Beyond this influence, why should you care? The list of past economics Nobel Prize winners<\/a> contains many people whose work is fascinating to economists but whose relevance to the lives of regular people is tenuous. <\/p>\n

\"TheRichard Thaler\u2019s work, however, has direct relevance for pretty much everyone. His early research helps save lives. His later research helps people save for retirement and helps save us from our own worst tendencies. The Swedish Academy made an astute choice in lauding his work.<\/p>\n

Jay L. Zagorsky<\/a>, Economist and Research Scientist, The Ohio State University<\/a><\/em><\/span><\/p>\n

This article was originally published on The Conversation<\/a>. Read the original article<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

Jay L. Zagorsky, The Ohio State University The 2017 Nobel Prize in economics was awarded to University of Chicago\u2019s Richard Thaler for his work in behavioral economics, which is the integration of economics with psychology. While the award was not a total surprise, since Thaler\u2019s name was floated earlier on the list of potential winners, […]<\/p>\n","protected":false},"author":44,"featured_media":10176,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[5,277],"tags":[3313,542,3309,3312,3311,3314,182,3283,3310],"_links":{"self":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts\/10175"}],"collection":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/users\/44"}],"replies":[{"embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/comments?post=10175"}],"version-history":[{"count":1,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts\/10175\/revisions"}],"predecessor-version":[{"id":10177,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts\/10175\/revisions\/10177"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/media\/10176"}],"wp:attachment":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/media?parent=10175"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/categories?post=10175"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/tags?post=10175"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}