Chicago professor wins Nobel Memorial Prize in Economics

By Vanessa Leal

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Professor of Behavioral Science and Economics Richard H. Thaler.  Photo courtesy of Wikimedia Commons.

University of Chicago professor Richard H. Thaler won the 2017 Nobel Memorial Prize in Economics for his work in behavioral economics. Thaler is one of the founders of behavioral economics and finance as a field. Thaler focused on human bias and temptation in making decisions, while mainstream economics mostly assumes humans act based on rationality.

“Behavioral economics is an attempt to analyse and describe economic behavior in ways that are more accurate than the standard rational behavior models that are typically used in economics,” chairman of the department of economics at RU, Gary Langer said. Langer explained the assumption of rationality has been a part of economics for a long time.

“People are assumed to have goals and are assumed to pursue those goals in an intelligent way. In the mainstream of economics, that is narrowed to the assumption that people are utility maximizers,” Langer said. Langer explained that most economists assume that people are mainly interested in satisfying themselves and that they arrange their economic lives in ways to maximize the satisfaction that they get from their market-place behavior.

Going against the flow and the core economics assumption, Richard Thaler worked for 40 years on the idea that humans are not always rational in their decisions and experience temptation. Thaler’s “Nudge theory,” was developed with one-time White House adviser Cass Sunstein, said that small incentives can drive people to make certain decisions and people create separate accounts in their minds to make financial decisions, focusing on narrow impacts rather them overall impacts.

“One of Thaler’s arguments is that there are various ways that the government can get people to do things to advance their interests. The interests of the community and the interests of the nation as a whole without using direct coercion,” Langer said.

“Thaler’s term is the government can ‘nudge’ them by setting things up in such a way that behavioral quirks that people have can be taken advantage of,” Langer said.

RU students commented on the issue by responding if they think they are rational consumers or if they are sometimes “nudged” by market agents or act on temptation.

Sophomore psychology major Maria Sanchez sees herself as a rational consumer, and for example always takes her credit card off at the end of first free month trials of online media streaming services. Sanchez said she falls for temptation when faced with big sales.

“I work at a retail and since I see customers all the time buying these really good sales and I have associate discounts, it makes me want to buy it even more,” Sanchez said about buying products on sale that she does not need.

Johnny Sarabia, junior history major, also sees himself as a rational consumer and said his spending patterns are not affected by mood conditions or big clearances and sales, but would change under circumstances of uncertainty such as risk of unemployment.

“I would consider myself as a practical person, so if anything, it would just be on the lines of just getting basic necessities and not indulging on anything,” Sarabia said.

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