Free exchange——Reasonable doubt
Richard Thaler wins the Nobel prize for economic sciences
The credit-card bill arrives.
You have enough money in a savings account to pay it off—the sensible thing to do, arithmetically speaking, since the interest rate on the credit-card balance far exceeds that earned on the savings.
Yet you leave the savings untouched, and pay only as much of the bill as your current-account balance allows.
What looks a daft choice to most economists makes perfect sense to Richard Thaler, who on October 9th was awarded the Nobel prize for economics for his work in behavioural economics.
Mr Thaler helped demonstrate how human reasoning diverges from that of the perfectly rational homo economicus used in most economic modelling.
The world, and the field of economics, is better for his contributions.
Economists mostly recognise that normal people fall short of perfect rationality in day-to-day decision-making.
Economic modelling requires simplification, however, and economists generally suppose that theories assuming people are well-informed and rational offer the best available account of economic activity.
Over time, however, scholars have built up an imposing list of the ways in which humans systematically refuse to behave as the models predict.
Economists such as Herb Simon (who won the Nobel in 1978) , Daniel Kahneman (2002) and Robert Shiller (2013) are celebrated for their contributions to this effort.
But perhaps more than any other scholar, Mr Thaler lifted behavioural economics to prominence, and helped put its lessons into practice.
Mr Thaler, an American born in New Jersey in 1945, spent most of his early career at Cornell Universitybefore moving to the University of Chicago in 1995.
Unusually for an economist, he is known for the clarity of his ideas and the quality of his writing.
“Nudge”, a book co-written with Cass Sunstein, is both an extraordinarily influential work and a bestseller.
Its lessons have been adopted by governments across the world; “nudge units” in America and Britain studied how to boost saving and taxpaying, encourage healthy behaviour and reduce energy use.
“Nudge” drew on years of work by Mr Thaler and co-authors identifying oddities in human behaviour.
Setting out to explore why people feel losses more keenly than gains, he helped uncover the endowment effect: a tendency to value something more highly just because you own it.
To detect it, he distributed coffee mugs at random to half of a group of test subjects, who were then invited to sell the mug, if they wished, to the other, mugless half.
Theory would predict that those with and without mugs should value them the same, on average, and so about half of the mugs should change hands.
In fact, those with mugs valued them more than those without.
Offers to buy the mugs by the have-nots were usually too low to convince the haves to sell, and relatively few transactions took place.
This finding, since replicated many times, suggested that the context of an economic choice matters.
That, in turn, means that the way choices are framed, by firms or governments, can influence how people respond.
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