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2017 Nobel Prize for Heretical Economics

The 2017 Nobel Prize in Economics was awarded to Richard Thaler, University of Chicago (they do seem to get a lot of Economics Nobel Prizes) for his work blending psychology with the dismal science, economics.    I quote from the article in the Hill:

The Nobel Memorial Prize in Economic Sciences went to Richard Thaler on Monday to honor his scholarly heresy. His work challenges the central principle of modern economics — the assumption that people are rational…

 

The rationality assumption has a specific meaning to economists: People can make choices, and those choices are mutually consistent. If John prefers an apple to a pear and a pear to an orange, then he also prefers an apple to an orange. With many twists on this theme, this definition of rationality has given economics coherence, rigor and humanity… 

 

Thaler and his behavioralist colleagues, though, correctly note that people are often far from rational, in ways that are essential to understanding human society. For example, rationality implies that more choices are better, but too many menu choices can paralyze diners. Too many investment options can deter people from making financial decisions….

 

Thaler has written on the “winner’s curse” — the observation that those who win auctions are often those who most overvalue the purchase. Sometimes, our choices are mutually inconsistent, or we change our minds erratically. Mainstream economists understand this but find it useful to leave such observations to psychologists and others…

 

But Thaler and crew argue that in certain areas of human behavior.. irrational people can be rather alike, after all. Their irrationality can be consistent and predictable. By exploring these realms, behavioralists find insights where standard economics never sheds light.

–Robert Graboyes, “The Hill” 10/11/2017

One neat application of Thaler’s psychological pruning of economic theory is illustrated in the featured image, “The fly in the urinal”, (from  Schiphol Airport Holland).   The image of a fly was etched into the urinal to reduce spillage and thereby reduce cleaning cost;  it was an eminently successful maneuver, reducing spillage by 80% and cleaning costs by 8%.  (The idea is to give males something to aim at;  I’m going to suggest this to the Principal of our parish parochial school, to improve the boy’s bathroom sanitation.) Thaler  and Sunstein used this in their book  “Nudge: Improving Decisions on Health, Wealth and Happiness”  as an example of a way to promote behavior without regulation or punishment,  what some have called “libertarian paternalism”.

And it isn’t great to see something sensible and useful  acknowledged with a Nobel?