Richard Thaler wins 2017 Nobel prize in economics – as it happened

Thaler will be giving a news conference in Chicago later, and here are the details:

Here’s Michael Lewis, author of the book The Big Short which was subsequently made into the film in which Richard Thaler appeared, on the new Nobel prize winner, from 2015.

And here is Thaler and Selena Gomez in that very film:

Just over a year ago Thaler and fellow Nobel prize winning economist Eugene Fama took part in an interesting debate about whether markets were efficient or irrational.

He also commented on Theresa May’s speech - not the parts that received the most commentary - but on her organ donor plans, in response to another tweet:

Thaler has criticised the Brexit vote as a prime example of irrational behaviour.

He told Business Insider just ahead of the UK referendum vote:

Most voters aren’t really thinking about it in a very analytical way… The people behind the leave campaign are voting with their guts. There’s no spreadsheet. This is much like a divorce without a prenup.

You’re voting to leave, and we’ll take care of all the financial details later.

Thaler was apparently slow to wake up when the committee called him with the news of his award, but was unsurprisingly pleased with the news.

His biography on the University of Chicago website lists one of his interests as “fine wine” which will no doubt be part of a celebration later.

His personal website is here but so far, no mention of the Nobel prize.

Here is one of the committee members talking about Thaler, and explaining what behavioural economics is:

Here’s our story on Thaler’s award:

The 2017 Nobel prize in economics has been awarded to the US academic Richard Thaler of the University of Chicago for his contribution to behavioural economics.

The prize, worth 9m Swedish kroner (£845,000), is not among the Nobel Foundation’s official awards for literature, peace, medicine, physics and chemistry, but was established separately by Sweden’s central bank, Sveriges Riksbank, in memory of the Swedish chemist Alfred Nobel.

The Royal Swedish Academy of Sciences described Thaler as a pioneer of behavioural economics, which had progressed in recent years from a fringe and somewhat controversial field of research into a mainstream component of the economics profession.

His research was praised for incorporating psychological assumptions into analyses of economic decision-making. The prize-givers said his work had shown how the limitations of an individual’s knowledge in the decision-making process, as well as the consequences of social preferences and a lack of self control, can affect people’s decisions as well as market outcomes.

Thaler, born in New Jersey in 1945, is a career academic and a Charles R Walgreen distinguished service professor of behavioural science and economics, and the director of the Center for Decision Research at the University of Chicago’s Booth School of Business. He made a cameo appearance in the 2015 film The Big Short, sitting beside Selina Gomez at a blackjack table.

He is a leading proponent of “nudge theory”, a concept of behavioural science that suggests small interventions in the environment, or incentives, can encourage people to make different decisions.

The full report is here:

Here is the citation on Thaler’s research on self-control:

In the twelfth song of the Odyssey, Circe warns Odysseus about the Sirens, who lure sailors with their enchanting singing. Odysseus who, like his crew, wanted to return home to Ithaca, solves the problem by plugging the crew’s ears with beeswax and then tying himself to the mast, with strict orders to the crew to ignore whatever he says until they are out of harm’s way. Odysseus’ problem is the epitome of this dilemma at all levels of our life, when we are tested by short-term temptations that threaten long-term wellbeing. This could be food and drink, smoking, consumption, saving for distant goals, or post-retirement planning. A person who chooses a longer education has a lower income during their studies, but can in return look forward to benefits in the future.

Experiences that are close in time take up more of our awareness than those that are further off; a thousand krona next year is perceived as worth less than a thousand krona today, regardless of whether it is an income or an expense. In traditional economic theory this is described using discounting – the assumption is that both income and expenses reduce by a constant factor with every passing month or year. Using such an assumption, the ranking of two future alternatives will always remain the same.

However, as Odysseus’ dilemma demonstrates, it is possible to change your mind when choosing between two options. The explanation is that experiences that are close in time take up more of our awareness – we discount more rapidly early on.

(It almost goes without saying of course, that Thaler was not one of the favourites to win the economics prize).

And here is an interview with the Financial Times (£) from last year.

Here’s a piece from 2008 by Aditya Chakrabortty on Thaler, including how he was being wooed by the UK conservative party:

Here’s more from the citation on Thaler’s research on fairness, complete with umbrella anecdote:

When making decisions, people not only take what is beneficial to themselves into account. They also have ideas about what is fair, and they can consider other’s welfare in both a positive way – through cooperation or solidarity – and a negative way – such as through jealousy or malice. Large-scale experiments conducted by Richard Thaler and other behavioural economists, have shown that notions about fairness play a major role in decision-making. People are prepared to refrain from material benefits to maintain what they perceive as just distributions. They are also prepared to bear a personal cost for punishing others who violate basic fairness rules, not only when they themselves are affected but also when they see someone else affected by injustice.

One frequent objection is that results from laboratory experiments cannot be transferred to real life, but it is easy to find examples where fairness considerations have an impact outside the laboratory. Unexpected rain can create an unexpectedly high demand for umbrellas, but if a shopkeeper then raises their price to match the high demand, many consumers react negatively and feel that the shopkeeper has behaved greedily.

And here is Thaler in the Big Short, with Selena Gomez:

One of Thaler’s theories is about “mental accounting”. The citation describes this as using different reference points to help make decisions, which vary from situation to situation: “One reference point could be the price for which we bought an item, or the lowest price we find when searching on the internet, and we use this reference point to assess whether we have made a “good deal”. In his research, Thaler has provided numerous examples of how mental accounting using differing reference points may lead to decisions that appear strange when evaluated from a traditional economic perspective.”

An example:

“A consumer who finds out that the watch she is about to buy is 100 Swedish krona cheaper in another shop. She chooses to go to the other shop if the watch costs 1,000 krona but won’t do so if it costs 10,000 krona even though the saving in krona is the same. The explanation is that she focuses on the percentage, rather than on the actual saving relative to the reference point.”

More on Thaler’s research is here.

The citation defines behavioural economics as “a research field in which insights from psychological research are applied to economic decision-making. A behavioural perspective incorporates more realistic analysis of how people think and behave when making economic decisions, providing new opportunities for designing measures and institutions that increase societal benefit.”

The committee is asked about the lack of women winners of the Nobel prizes, and the panel says they are concerned and they are taking measures to improve the situation. They think things will improve and hope it will be different in five to ten years time.

Thaler is asked about the Chinese economy, but says he is not really an expert on that. And he is now gone.

Thaler is on the phone to the press conference now.

He is asked what the most important aspect of his research is.

He says it is the recognition that economic agents are human, and that economic models have to incorporate that.

The citation says Thaler has incorporated psychologically realistic assumptions into analyses of economic decision-making. He has shown how the following three traits affect individual decision-making, as well as market outcomes:

Limited rationality: 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 behavioural finance, which studies how cognitive limitations influence financial markets.

Social preferences: Thaler’s theoretical and experimental research on fairness has been influential. He showed how consumers’ fairness concerns may stop firms from raising prices in periods of high demand, but not in times of rising costs. Thaler and his colleagues devised the dictator game, an experimental tool that has been used in numerous studies to measure attitudes to fairness in different groups of people around the world.

Lack of self-control: Thaler has also shed new light on the old observation that New Year’s resolutions can be hard to keep. He showed how to analyse self-control problems using a planner-doer model, which is similar to the frameworks psychologists and neuroscientists now use to describe the internal tension between long-term planning and short-term doing. Succumbing to shortterm 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.

The committee said: “Richard Thaler’s contributions have built a bridge between the economic and psychological analyses of individual decision-making.”

Thaler is professor of behavioural sciences and economics at the University of Chicago.

This year’s prize is awarded to RIchard H Thaler for his contributions to behavourial economics.

And we’re off.

With just a few minutes to go, here is a live link to the announcement of the Nobel Prize in Economics, which is also at the top of this blog:

And here’s something on the only woman to win the Economics prize:

Here are some facts and figures about the Nobel Prize in economics:

It’s striking that only one woman has won the prize since it was first awarded in 1969. And if this year’s winner is indeed one of the favourites, it will remain that way.

Back with the pound, and the currency is shrugging off the latest Brexit worries and political problems. Connor Campbell, financial analyst at Spreadex, said:

Sterling is using Monday’s bone dry economic calendar as an opportunity to claw back some of last week’s rather severe losses.

One could argue that such a data-less day would only throw a harsher spotlight on the latest round of Tory turmoil. Predictably the weekend’s papers were full of reports of party infighting, with one group urging Theresa May to say goodbye to Boris Johnson, and another, more Brexity cabal attacking the pro-EU Chancellor Phillip Hammond.

However, sterling seems to have steeled itself somewhat over the weekend, calming the value-eroding jitters that plagued last Thursday and Friday. Perhaps the fact that nothing more dramatic happened – no resignations or comments from Johnson etc – has eased some of the currency’s fears.

Regardless, it is making a decent fist of taking the edge off its recent losses; cable’s up 0.4%, pushing the pound back above $1.31, while its half a percent rise against the euro sees it just under €1.12. Of course, in the context the last few weeks, sterling is still struggling; the fact it has (so far) started the week on the right foot, however, is an important step on its potential road to recovery.

Understandably, given its recent reliance on a weakened pound, the FTSE wasn’t too enthused about the currency’s comeback, though it did manage to hold above 7500 after the bell. The Eurozone indices were far perkier; the DAX hit a new high after climbing 0.3%, and is inches away from crossing 13000, while the CAC surged 0.5% to graze 5375.

But here’s a cynical reminder about predictions about the winners:

Indeed last year’s winners, Oliver Hart of Harvard, and Bengt Holmström of MIT, were not top of the lists of likely recipients.

My colleague Richard Partington has been looking at the runners and riders, who include the former governor of the Reserve Bank of India and a string of US academics. His full report is here: