Professor Richard Thaler from the University of Chicago is this year’s winner of the prestigious Nobel Memorial Prize in Economic Sciences. The Royal Swedish Academy made the official announcement on Monday and said that they choose him for his enormous contributions to behavioral economics. However, the main reason for which the professor received this famous award was his amazing capacity of developing theories that combine economics with psychology.
According to a news release from the Swedish Academy, Thaler has successfully explored things like social preferences, self-control or the lack thereof, and even limited rationality. Moreover, he has managed to create links between those human psychological traits. Therefore, he was able to see how they affect our decision-making abilities as well as the markets.
Winner of Nobel Prize in Economic Sciences
One of Thaler’s most interesting and famous theories is the one called the theory of mental accounting. This states that people mainly focus on the precise impact and outcome of a certain decision, instead of focusing on their overall effect. Also, the fact that customers are very concerned about fairness prevents companies from being able to increase prices. Apart from when those are needed because of increased costs.
And experts agree with Thaler’s interesting theories. Investors are not usually the most rational beings. The professor took this idea that people receive more information than they can process. He then linked it with something extraordinary, like how it affects markets. Moreover, he also offers some of the so-called “shortcuts”. People sometimes use those to be able to process such a huge amount of information. The result is that herd instinct that’s present in the stock prices. This is precisely why things like subsequent crashes and momentum bubbles happen.
A number of amazing theories
It’s also worth noting that this domain is even more difficult. Mainly because in financial economics we do not have any laws of nature. So, not everything that seems or should be rational actually is. Thaler also has his famous “nudge” theory that as outlined in a best-seller 2008 book. According to him, small pieces of information, like telling a village that everybody else has already paid their taxes, will surely make the others pay them too. This is also a theory that both ex-president Barack Obama and former U.K. Prime Minister David Cameron have studied with their teams.
Image source: wikimedia