The Story behind 2017 Nobel Prize in Economics

Bezon Kumar 

Photo: Transfin YouTube Chanel and Internet

A few days ago the Nobel Committee declared the name of winners of the world's most prestigious prize, Nobel Prize. No doubt, the prize is awarded to those persons and institutions who contribute to the development of the society by their successful and extraordinary invention and research.

The prize is awarded in six categories Economics is one of them. This year, Richard H. Thaler is declared as the winner of the 2017 Nobel Prize (Economics). Why is Thaler awarded for the prize? What is his contribution? This paper explores the pros and cons of the 2017 Nobel Prize in Economics.

Before discussing the main topic, let explore the 'Nobel Prize' briefly. Nobel Prize is named after the tribute to the world-famous chemist and industrialist Alfred Nobel (1833-1895). He invented 355 extraordinary scientific inventions, Dynamite being the most famous one.

This major economic income comes from inventions. A year before his death, he made a will in which he donated 94 % of his total wealth, (4.4 million USD in total) to accolade the ones who restore peace in our universe. After a few years after his death, the will was sanctioned and in 1895 the Nobel Foundation was set-up.

The prize was initially to be awarded in five categories: Physics, Chemistry, Medicine, Peace, and Literature. Royal Swedish Academy of Sciences Used to announce the prize in Physics, Chemistry, and Literature. On the other hand, Karolinska Institute and Norwegian Nobel Institute announce the prize in Medicine and Peace, respectively.

As awarding in Economics was not in the list, Nobel Prize in Economics was not awarding form the beginning is started to award from 1969. The award is not given from the original fund of the Nobel Foundation but from the fund given by the central bank of Sweden in honor of celebrating 300 years of the bank.

While donating this fund, the bank suggests the Nobel Foundation for awarding the Prize in Economics in Memory of Alfred Nobel. From that time, the prize is given away by the Royal Swedish Academy of Sciences named 'The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel'. Nobel Foundation gives away the prizes to the winners following its rules and regulations strictly. 

By January 31, every year, the foundation nominates form to 3000 persons in the world and Nobel Committee nominates 300 from them and sends the list to the respective organizations. With voting, the winners are selected by respective organizations. The prize is awarded to the living legends. However, there are some exceptions also.

A prize has been given to maximum three persons and for two distinct contributions. Every year the name of winners was declared in October and the winners were called 'Laureate'. The prize was finally handed over to the laureates on 10 December, the day of Nobel's departed from Earth.

Nobel Prize in 'Peace' is given from Norway's Oslo City Hall and other prizes are from Sweden's Stockholm Concert Hall. Each Laureate is given a gold medal, a diploma, the citizenship of Sweden, and a huge amount of money. At present, the amount is US $1.4 million. This money is given to the laureates to continue their higher research. But, actually, it is seen that the prizes are going to aged personas who are retired.

Let's come back to the main topic. The Royal Swedish Academy of Sciences decides to award The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2017 to Richard H. Thaler, announced by Göran K. Hansson, Secretary-General of the Royal Swedish Academy of Sciences, on Monday, October 9.

The Nobel Laureate American Economist Richard Thaler is born on 12 September 1945 in East Orange, New Jersey, USA. His father, Allen M. Thaler, was an actuary and wanted his son to follow in his footsteps, but Thaler wanted to be a different one. Thaler's mother, RoselinMelnikov, was a school teacher.

Although Thaler wanted to study Psychology, he completed graduation in Economics from Western Reserve University in 1967. Three years later he completed post-graduation in the same discipline from the University of Rochester. After being awarded a Ph.D. in 1974 from the preceding university, Thaler started his career. He also served at Cornell University and MIT for a while.

After marrying Francis Leklark, Thaler along with his wife joined at University of Chicago Booth School of Business in 1995. Presently, he is a distinguished Professor of Behavioral Science and Economics of the university. In 2008, he wrote a book named 'Nudge: Improving Decisions about Health, Wealth and Happiness' which is related to behavioral economics.

Richard Thaler worked as an Adviser of former US President Barak Obama to make the 2012 election campaign successful. He was also the adviser of the UK's former Prime Minister, David Cameron's Behavioral Inside Team. In 2015, he as well acted in a Film named The Big Short that led to the 2008 financial crisis.

Thaler is awarded Nobel Prize for his contributions to behavioral economics. He is regarded as one of the founders of the field of behavioral finance which studies how cognitive limitations influence financial markets. Thaler has become famous for integrating economics with psychology.

More distinctly, he incorporates psychologically realistic assumptions, analyzing into economic decision-making. Besides, by exploring the consequences of limited rationality, social preferences, and lack of self-control, he shows how human traits systematically affect individual decisions as well as market outcomes.

In order to explain limited rationality, Thaler developed the theory of mental accounting where he explains 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 explains a phenomenon called 'the endowment effect' - aversion to losses can explain why people value the same item more highly when they own it than when they don't. Thaler interprets the phenomenon 'social preferences' in the following way.  In his research, he shows how consumers' fairness concerns may stop firms from raising prices in periods of high demand, but not in times of rising costs. He devises the dictator game to measure attitudes to fairness in different groups of people around the world.

To explain the lack of self-control, Thaler throws new light on the old observation of New Year's resolutions that can be hard to keep up with. He shows how to analyze self-control problems using a 'planner-doer' mode. This is similar to the framework psychologists and neuroscientists now use to describe the internal tension between long-term planning and short-term doing.

Succumbing to short-term temptation is an important reason for our plan to save up for old age or make healthier lifestyle choices, which often fail. In his distinguished work, Thaler demonstrates how nudging may help people exercise better self-control when saving for a pension, as well in other contexts.

In total, Richard Thaler's contributions have built a new bridge between the economic and psychological analyses of individual decision-making. This ideology has brought a large new window of research in Economics. For this, people must remember him for decades.  

The writer is a Teacher and Researcher in Economics of Rabindra University, Bangladesh. Email: bezon.kumar3@gmail.com

Published in The Daily Asian Age on 12 November 2017. (Edited Briefly)