Thaler’s Nobel Prize Winning Work in Behavioural Economics

It’s one of two major assumptions in economics, and taught within the first week in most 101 classes: rationality. How do we define rationality? Of course, we can assume that human behavior is “rational”, but that doesn’t help us construct any models unless we actually ascribe the word some meaning.

Researching empirically what “rationality” might mean has been ascribed with some hostility in the field of economics, simply because the traditional definition revolves around maximizing utility, with some differentiation school-to-school. Then there’s the behavioral school of thought that sees to define human decisions as “irrational”, at the very least not “rational” in the Classical sense. [1]

Of course, few schools of thought are taken seriously without heavy backing from grants and awards, and Behavioral Economics may have found another foot to put in the door: Richard Thaler. Richard is one of now six other economists (Akerlof, Fogel, Kahneman, Ostrom, Shiller) that have any association with the school, making up about six percent of all awards. [2]

Richard Thaler’s work has won the Nobel Prize for Economics this year I think as the Economist put it, because it “demonstrates why economics is hard”.[3] Not in the sense that it’s allusive to most people even in the academic settings, but also because many models, like in physics are hailed and then challenged by changing historical circumstance. Traditionally, these models are made theoretically and then applied, from what my high school economics teacher used to call “intuition”. Behavioral economists use experiments to generate data in closed experiments, which then can suggest certain correlations between their behaviors and the “rules”, or in real life, “policies” and then suggest “nudges” to encourage good decision-making.

One of Thaler’s most famous experiments was suggested that human sentiments play a large role in the decisions they make. The experiment was “the dictator game”, where two players are given $20. They can split the money 50/50, or one can keep $18, and the other $2- however, only one player decides. Of course, most schools of thought would suggest the rational choice is the latter, as it maximizes utility, but most students chose the 50/50 decision. [4]

Personally, I think Thaler, and most behavioral economists are on the right path, but I see no point in differentiating “rationality” and subjecting behavioral economics to the title of “irrationality”- after all, if in fact, human emotion means in the case of “the dictator game” more than $8, there’s nothing to suggest that we don’t receive approximately measurable utility from conforming to our values and being what we perceive to be decent people. Behavioral economics, as I think the Nobel Committee realizes, doesn’t need to necessarily discredit economics, but it does offer a lot in terms of how we can make the study more accessible, and more applicable, however more complicated.






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