Pioneer of behavioural economics is best known for ‘nudge’ theory, which has influenced politicians and policymakers
One of the founding fathers of “nudge” theory, which has helped boost British tax receipts and encouraged smokers to become vapers, has been awarded the 2017 Nobel prize for economics.
Richard Thaler co-wrote a bestselling book on the nudge concept read by politicians around the world and soon had them embracing the notion that people can be influenced by prompts – such as changing the wording of tax demands – to alter their behaviour.
As well as tweaking the sentences in tax reminder letters to increase HMRC takings, Thaler’s branch of economics has influenced Theresa May’s announcement of an “opt out” policy for organ donations where it is presumed that people wish to donate body parts unless they state otherwise. The Department of Health has also adopted nudge principles in its approach to e-cigarettes.
The Nobel committee said the 72-year-old, who made a guest appearance in the 2015 credit crunch film The Big Short with Selena Gomez, has provided a “more realistic analysis of how people think and behave when making economic decisions.” Asked what he planned to do with his 9m krona (£840,000) prize money, Thaler joked that he intended to spend it “as irrationally as possible”, in a nod to his work showing how people’s choices on economic matters are not always rational.
Nudging stems from the field of behavioural economics, examining how gut instincts can often overrule rational choices, in which Thaler is regarded as a pioneer.
The US academic, who is a professor at the University of Chicago, has previously suggested that Brexit could be an example of behavioural economics in action. He argued British voters chose an economically irrational route when considering the options put to them by elites and the mainstream media.
“Personally I think a vote to leave is a highly risky move. Most voters aren’t really thinking about it in a very analytical way,” he said in an interview before the referendum last year.
Thaler co-wrote the global bestselling book Nudge: Improving Decisions about Health, Wealth, and Happiness in 2008 with the US professor Cass Sunstein, which brought the theory to wider attention. He was an adviser on the creation of the “nudge unit” at the heart of Whitehall initiated as a pet project by David Cameron in the earliest days of his premiership from 2010 in the coalition government.
The unit was initially focused on public health issues such as obesity, alcohol intake and organ donation, although its scope has ballooned to cover everything from pensions and taxes to mobile phone theft and e-cigarettes. Formally called the Behavioural Insights Team, but widely known after Thaler’s book, the nudge unit is credited with encouraging 100,000 extra organ donations a year and persuading 20% more people to consider changing energy provider.
Thaler is a leading voice on how nudging can tackle problems in society, although retailers often employ behavioural economics to encourage greater sales by making small changes to alter the buying habits of consumers.
The academic has previously said the Ponzi scheme fraudster Bernie Madoff was a master in winning people’s confidence, and could have written a similar book showing how to use nudge theory for personal gain.
Nudge theory has been criticised by some sections of the political right for being overly paternalistic, while it has also been described as a neoliberal idea by the left because it relies on individual choice instead of overt state intervention. Unlike the field of classical economics – whereby decision-making is based on cold-headed logic – behavioural economics allows for irrational actions and attempts to understand why this might be the case. The concept can be applied in miniature to individual situations, or more broadly to encompass the wider actions of a society or trends in financial markets.
Thaler becomes the latest American economist to win a prize increasingly dominated by US citizens, now accounting for roughly half of laureates since the inception of the Nobel prize in economic sciences in 1968.
Women are significantly underrepresented in the economics prize compared with some of the other Nobel awards, such as those given for peace or literature. The US political economist Elinor Ostrom, who died in 2012, remains the only woman to have won the award. She shared the prize in 2009 with fellow US academic Oliver Williamson for her work exploring how people manage collective resources.
The award for economics 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.