University of Chicago’s Richard H. Thaler, one of the founders of behavioral 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 “has incorporated psychologically realistic assumptions into analyses of economic decision-making,” the Royal Swedish Academy of Sciences said in a statement on Monday.
“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,” it said.
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, according to the Swedish academy. He shed light on how people succumb to short-term temptations, which is why many people fail to plan and save for old age.
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. His best-known work, “Nudge,” written together with Cass R. Sunstein, explored the concept of tackling societal hurdles by applying behavioral economics. Other books include “Quasi-Rational Economics,” “The Winner’s Curse: Paradoxes and Anomalies of Economic Life” and “Advances in Behavioral Finance.”
Born in New Jersey, Thaler graduated with a bachelor’s degree from the Case Western Reserve University in 1967. He received a master’s degree from the University of Rochester in 1970 and a doctorate in 1974, also from Rochester. Thaler joined the University of Chicago’s Booth School of Business in 1995.
The academy said his work has “built a bridge between the economic and psychological analyses of individual decision-making.”
Previous Winners
Last year’s economics prize went to Harvard University’s Oliver Hart and Bengt Holmstrom of the Massachusetts Institute of Technology for their work on contract theory and its role in shaping everything from executive pay to public sector privatizations. Previous laureates have included Milton Friedman, James Tobin, Paul Krugman and Friedrich August von Hayek.