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Monday, October 9, 2017

Nobel in Economics Is Awarded to Richard Thaler 10-09

Richard H. Thaler was awarded the Nobel Memorial Prize in Economic Science on Monday for his contributions to behavioral economics.

The economist Richard H. Thaler at his home in Chicago on Monday after winning the 2017 Nobel Memorial Prize in Economic Science. He said he would try to spend the prize money “as irrationally as possible.”  

Shyam's Insight on this....

 I am happy that Prof. Thaler gets the Nobel Prize for Economics,

I am also happy for Dr. Raghuram Rajan for being one of the six candidates for the prize.

I am also happy for the The University of Chicago Booth School of Business  with which the two are associated.

Prof. Richard Thaler won the Nobel Prize for his work on Behavioral Economics. 

I myself being a keen student of behavioral sciences.

I feel happy at a new rational status being accorded to the irrational economic behavior of human beings.

I am also elated at the 'endowment effect" getting a status in Economic psychiatrics. This will allow the  'Behavioral Economics' in total to get  get the much needed and overdue  recognition and accord it an important position in Economic research. 

We can now see more encouragement and increase in funding for this psychological branch of economics.

Now the post....

Professor Thaler, born in 1945 in East Orange, N.J., works at the University of Chicago’s Booth School of Business. The Nobel committee, announcing the award in Stockholm, said that he was a pioneer in applying psychology to economic behavior and in shedding light on how people make economic decisions, sometimes rejecting rationality.

His research, the committee said, had taken the field of behavioral economics from the fringe to the mainstream of academic research and had shown that it had important implications for economic policy.

Professor Thaler said on Monday that the basic premise of his theories was that, “In order to do good economics you have to keep in mind that people are human.”

Asked how he would spend the prize money, he replied: “This is quite a funny question.” He added: “I will try to spend it as irrationally as possible.”

The economics prize was established in 1968 in memory of Alfred Nobel and is awarded by the Royal Swedish Academy of Sciences.

Mainstream economics for much of the 20th century was based on the simplifying assumption that people behaved rationally. Economists understood that this was not literally true, but they argued that it was close enough.

Professor Thaler has played a central role in pushing economists away from that assumption. He did not simply argue that humans are irrational, which is obvious but also unhelpful. Rather, he showed that people depart from rationality in consistent ways, so their behavior can still be anticipated.
For example, he showed that people do not regard all money as created equal. When gas prices decline, standard economic theory predicts that people will use the savings for whatever they need most. In reality, people still spend much of the money on gas. They buy premium gas even if it is bad for their car. In other words: they treat a certain slice of their budget as gas money.

Professor Thaler also showed that people place a higher value on their own possessions. In a famous experiment, he and two co-authors distributed coffee mugs to half the students in a classroom and then opened a market in mugs. In general, the students who had randomly been given a mug regarded it as being twice as valuable as did the students who were not given a mug.

Professor Thaler named this phenomenon, since documented across a wide range of human experience, an “endowment effect.” One of his co-authors, Daniel Kahneman, was awarded the Nobel prize in economics in 2002. At the time, some argued that Professor Thaler should have shared in the award.

The importance of fairness is another key area of Professor Thaler’s research. He showed that people care deeply about fairness and will penalize behavior they regard as unfair even if they do not benefit by doing so.

This has important economic implications. It explains, for example, why an umbrella store may not raise prices during a rainstorm.

It also illuminates the mechanics of economic recessions. Standard economic theory predicts that during an economic downturn, employers will cut wages to a level consistent with the demand for goods or services, so there is no reason to think a downturn will produce unemployment.

Why then does unemployment rise during downturns? Workers regard wage cuts as unfair. Employers, seeking to avoid angering the workers they keep, prefer to eliminate people rather than cutting the wages.

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