By Ritika Chauhan
On 9th October 2017, the highest honour in the field of economic science was awarded to the 72-year-old American Dr Richard Thaler. The economist will be presented with this honour on 16th October in Stockholm. Dr Thaler is the third behavioural scientist to win the prize, following Daniel Kahneman (2002) and Robert Shiller (2013).
A behavioural finance pioneer
Dr Thaler is a distinguished professor of economics and behavioural sciences at the University of Chicago and the Director of the Centre for Decision Research at the University. He is a pioneer in building economics on reasonable assumptions so as to bring efficiency and effectiveness in public policies. He has also conducted research on a variety of topics ranging from asset prices, property crime, and mental accounting. Clear concepts and quality writing are his hallmarks among scholars. He is also known to have founded an entire discipline of behavioural finance which closely studies all factors that narrowly influence individual financing decisions, self-control, and long-term and short-term plans. The Nobel Committee has appraised Dr Thalers efforts to bring behavioural economics to the forefront in framing public policies. All of his work is primarily based on the idea that in order to do good economics, one must keep in mind that people are humans.
Rethinking traditional rationality
Earlier economists believed that humans were rational beings who wanted to maximise their returns; any assumption otherwise was seen as unnatural to economics. However, with more and more findings in behavioural science, the economists have begun giving due consideration to cognitive biases. Richard Thaler leads the movement that promotes that assumptions in economics with respect to human behaviour should be reasonable, and therefore, wider in scope.
Nudging towards a new paradigm
In several books and columns, Thaler has discussed instances where the economic behaviour of humans violates the traditional assumption of rationality in human decisions. This is primarily an attempt to draw a bridge between economics and psychology to understand more realistically how humans make buying and other financial decisions. In particular, three psychological traits viz. limited rationality, perception about fairness and lack of self-control are being studied to expand economic analysis.
The above-mentioned concept has been given the name of nudging to imply what nudges a buyer to make a decision. Although corporates have been applying this concept for years, governments are just getting used to the idea of applying behavioural economics to their use. From Australia to America as well as organizations like the UN and World Bank, the nudging concept is being adopted.
Dr Thaler has told interviewers that he will be spending his reward of $1.1 million in consistency with his researchas irrationally as possible. He has said that he would be continuing his work in behavioural economics.
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