University of Chicago Booth School of Business economist Richard Thaler talks to his "Nudge" co-author Cass Sunstein via S...

Richard Thaler earns Nobel prize for making ‘economics more human’

The 2017 Nobel prize in economics has been awarded to University of Chicago economist Richard Thaler for his work in behavioral economics.

The Nobel committee called Thaler a “pioneer,” paving the way for a new field of study that looks at the intersection of economics and human psychology. Simply, the committee said Thaler “made economics more human.”

“Thanks to his contributions and discoveries this new field has gone from being sort of a fringe and somewhat controversial part of economics to being a mainstream area of contemporary economic research,” Per Stromberg, the chairman of the Nobel Economics Sciences committee, said while announcing the prize Monday.

Thaler was born in New Jersey in 1945 and completed his Ph.D. at the University of Rochester. He has taught at the University of Chicago for the past 22 years.

In a phone call immediately following the announcement, Thaler said “to do good economics you have to keep in mind that people are human.” He added the most important impact of the prize is “the recognition that economic agents are human, and that economic models have to incorporate that.”

“The idea that markets work perfectly is no longer tenable,” Thaler said in a 2015 interview with the Newshour.

He used the example of his 2015 book, “Misbehaving: The Making of Behavioral Economics.” Traditional economists would argue if someone makes the decision to buy Thaler’s book, that is proof enough they want it at the given price. But Thaler said when his book is “on sale” for 30 percent off, people are more likely to buy it, even if they would not pay that price for it normally.

“People love deals. They can be driven to purchase things that they don’t really want if the deal is good enough,” Thaler said.

In economics, a theory has long prevailed that markets are based on people making rational choices. But behavioral economist Richard Thaler is seeking to prove that there is far more randomness to our financial decisions. Economics correspondent Paul Solman talked to Thaler to find out why we buy and to discuss Thaler’s new book, “Misbehaving.”

The Nobel committee highlighted three of Thaler’s theories on human behavior: the limit of human rationality, the desire for fairness, and the lack of self-control in financial decisions.

The first pattern, known as “bounded rationality,” builds on the theory that even if humans attempt to make rational decisions, they have limited cognitive ability and do not always make the most efficient economic decisions.

The second pattern notes that even if people are guided by self-interest, they also have a social bias toward fairness.

The third pattern is the belief that humans sometimes suffer from a lack of self-control.

Thaler devised the “planner-doer model” for how economic models, which often assume people will make the most rational choice, can account for that lack of self-control.

Thaler theorizes that both the “planner” and “doer” exists within all humans.

To resolve the conflict between the long-term concerned “planner” and the short-term concerned “doer,” the planner can impose rules that limit the doer’s choices, such as only buying one pack of cigarettes at a time.

Thaler has also advocated a concept he and his colleagues call “libertarian paternalism,” or economic policies that nudge people into making better economic decisions.

One system Thaler designed for pensions, called “Save More Tomorrow” asks an individual to commit a share of future salary increases to savings. It worked. Those who participated in the program nearly quadrupled their rate of savings.

As part of the Nobel prize, Thaler will receive $1.1 million. When asked how he would spend the money, Thaler joked, “I will try to spend it as irrationally as possible,” he said.

Sweden’s central bank established the economics prize in 1968 in memory of Nobel Prize founder Alfred Nobel. Including Thaler, it has been awarded to 79 laureates since then.