Friday, 15 December, 2017

Integrating economics, psychology into better economic research, policy

10 Oct 2017, 02:34 ( 2 Months ago)

DF-Xinhua Report by Fu Yiming, Li Jizhi and Zhang Xuan
Richard H. Thaler, 2017 Nobel Prize winner in Economics, attends a press conference at University of Chicago Booth School of Business in Chicago, the United States, on Oct. 9, 2017. Photo Xinhua.

Discounts or exhortations of the type "buy three, pay for two" give consumers a sense of having gained and so move the reference point for evaluating the price. Lotteries and betting are marketed through overexposing the rare winners and covering up the multitude of losers. Many consumers are lured into taking loans with disadvantageous terms so they can buy an item they cannot actually afford.

Common marketing practices can be understood as taking advantage of consumer irrationality. Thaler's research, together with those of other behavioral economists, can help us recognize marketing tricks and avoid unfavorable economic decisions, said the Royal Swedish Academy of Sciences in its statement.

The 2017 Nobel Prize in Economics, or officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, was awarded to Richard H. Thaler "for his contributions to behavioral economics," announced the Royal Swedish Academy of Sciences in Stockholm on Monday.

"Thaler's achievements successfully integrated economics and psychology, as he made economics more human. His theories can help people make better economic decisions," said Peter Gardenfors, member of the committee for the Economics Prize.

Thaler contributed to expanding and refining economic analysis by considering three psychological traits that systematically influence economic decisions -- limited rationality, perceptions about fairness, and lack of self-control.

Thaler developed the theory of mental accounting, explaining how people simplify financial decision-making by creating separate accounts in their minds, focusing on the narrow impact of each individual decision rather than its overall effect. He also showed how aversion to losses can explain why people value the same item more highly when they own it than when they don't, a phenomenon called the endowment effect.

Thaler was one of the founders of the field of behavioral finance, which studies how cognitive limitations influence financial markets, the statement said.

Succumbing to short-term temptation is an important reason why our plans to save for old age, or make healthier lifestyle choices, often fail. In his applied work, Thaler demonstrated how nudging -- a term he coined -- may help people exercise better self-control when saving for a pension, as well in other contexts, according to the statement.

Research in behavioral economics can be used by politicians and other decision-makers to design alternatives that provide benefits to society. Thaler and his colleagues have argued that, both public and private institutions should actively (but with maintained freedom of choice) try to nudge individuals in the right direction, by making simple improvements, and societal benefits can be achieved in fields such as organ donation, environmental policy, and pension savings, said the statement.

Thaler told Xinhua that said he had not planned very far about his future researches, and that he was currently focused on researches on "nudging" and the Swedish pension system. 

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