Place yet another Nobel Prize on the trophy shelf at the University of Chicago’s Booth School of Business. The school earned its eighth prize today (Oct. 9) when the Royal Swedish Academy of Sciences awarded Booth Professor Richard H. Thaler the Nobel for his contributions to behavioral economics.
The 72-year-old Thaler, the author of several bestselling books on economics, was recognized for his profound influence on the field of economics and specifically his research that probes the implications of relaxing the standard economic assumption that everyone in the economy is rational and selfish, instead entertaining the possibility that some of the agents in the economy are sometimes betray human tendencies that make their decisions hard to explain by traditional economic theory. Thaler has chronicled the struggle to bring the academic discipline of economics back down to earth and explained how behavioral economic analysis can change the way people think about everything from household finances to the NFL draft.
The Nobel Committee said that Thaler “has incorporated psychologically realistic assumptions into analyses of economic decision-making. 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 UNIVERSITY OF CHICAGO NOW CLAIMS 89 SCHOLARS WITH NOBELS
The university noted that he is among 89 scholars “associated” with the university to receive Nobel Prizes and among the 28 who have received the Nobel Memorial Prize in economics. Seven other business school faculty at Chicago have won Nobels, including George Stigler in 1982, Merton Miller in 1990, Ronald Coase in 1991, Gary Becker in 1992, Robert Fogel in 1993, Myron Scholes in 1997, and Eugene Fama in 2013. Among the world’s business schools, no other institution can claim more faculty who have won the prestigious honor.
Bragging rights on Nobels among universities reflects the prestige of the award and prize. Stanford’s Graduate School of Business, which claims two Nobels for its faculty, for example, also counts Myron Scholes as one of its own. That’s because Scholes, known for his work with colleague Fischer Black on an options valuation formula, finished up his academic career at Stanford from 1983 until 1996. But Scholes earned his MBA and Ph.D. at the University of Chicago and ultimately taught there for ten years between 1973 and 1983 when the Black-Scholes model came to fruition.
Not surprisingly, the University of Rochester also began its own brag fest on Thaler today because he received his master’s from the University of Rochester in 1970 and his PhD from the University of Rochester in 1974. Born in New Jersey in 1945, Thaler attended Case Western Reserve University where he received a bachelor’s degree in 1967.
Before joining the Chicago Booth faculty in 1995, Thaler taught at the University of Rochester and Cornell University. He also served as a visiting professor at the University of British Columbia, the Sloan School of Management at MIT, the Russell Sage Foundation, and the Center for Advanced Study in Behavioral Sciences at Stanford University.
MENTAL ACCOUNTING, PLANNER-DOER, AND NUDGING
The Nobel committee credited Thaler with developing “the theory of mental accounting,explaining how people simplify financial decision-making by creating separate accounts in their minds, focusing on the narrow impact of each individual decision rather than its overall effect. He also showed how aversion to losses can explain why people value the same item more highly when they own it than when they don’t, a phenomenon called the endowment effect. Thaler was one of the founders of the field of behavioural finance, which studies how cognitive limitations influence financial markets.”
Thaler, the committee added, has also shed new light on the old observation that New Year’s resolutions can be hard to keep. “He showed how to analyse self-control problems using a planner-doer model, which is similar to the frameworks psychologists and neuroscientists now use to describe the internal tension between long-term planning and short-term doing. Succumbing to shortterm temptation is an important reason why our plans to save for old age, or make healthier lifestyle choices, often fail. In his applied work, Thaler demonstrated how nudging – a term he coined – may help people exercise better self-control when saving for a pension, as well in other contexts.”
ONE OF THALER’S BOOKS DIRECTLY INFLUENCED BRITISH GOVERNMENT POLICY
The author of the bestselling books Misbehaving: The Making of Behavioral Economics (2015) and Nudge: Improving Decisions About Health, Wealth and Happiness (2008), Thaler is renowned for creating easy-to-understand scenarios that show how human behavior often contradicts traditional economic logic.
Nudge, co-authored with Harvard Law School Professor Cass R. Sunstein, explores how the concepts of behavioral economics can be used to tackle many of society’s major problems and influence public policy. Ranked as the Best Book of the Year by The Economist and Financial Times, the research prompted the United Kingdom’s government in 2010 to establish a Behavioral Insight Team, or “Nudge Unit,” to create policies that nudge British citizens to make better choices and, in turn, save the state money. Thaler served as an advisor in setting up the unit’s guiding principles.
Thaler’s other books include Quasi-Rational Economics and The Winner’s Curse: Paradoxes and Anomalies of Economic Life, His work has been published in the American Economics Review, the Journal of Finance, and the Journal of Political Economy.