The 2017 Nobel Prize in Economics, more specifically « the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, » was awarded today to American Richard H. Thaler of the University of Chicago for his work on behavioral finance. He was one of its founders.
Richard H. Thaler has shown how certain psychological mechanisms, such as the limits of rationality, social preferences, and lack of self-control, influence individual decisions and market trends.
With regard to limited rationality, Thaler developed the concept of mental accounting, which shows how people focus primarily on the individual consequences of a decision rather than its overall consequences. He also developed the concept of loss aversion, which demonstrates how risk aversion can explain why we value the objects we own more than other objects.
Richard H. Thaler has also worked on the degree of fairness shown by consumers: in particular, he used the dictator game, which observes the amount of money that individuals can share when they could keep it all if they wanted to. This can prevent certain companies from increasing their prices during periods of high demand, but not during periods of rising costs.
Finally, it is always difficult to keep our New Year’s resolutions. Richard H. Thaler analyzed the dilemma that can arise between long-term planning and short-term actions. A good illustration of this tension is the episode of Ulysses facing the Sirens in Homer’s Odyssey. He showed that indirect suggestions rather than direct prescriptions are often more effective in setting aside resources, particularly for retirement.
Richard H. Thaler has also collaborated with Daniel Kahneman and Robert Shiller.
Last year, Oliver Hart of England and Bengt Holmström of Finland were recognized for their contributions to contract theory.
Sources: Le Monde, Press release from the Royal Swedish Academy of Sciences
