An American professor won the Nobel Prize in economics on Monday for groundbreaking research into why people make bad decisions.
Richard Thaler, whose work influenced the Obama administration and led to a cameo in “The Big Short,” was cited for his research in the field of behavioral economics. He gets 9 million Swedish krona, or about $1.1 million.
“I will try to spend it as irrationally as possible,” he told reporters.
Economics is built on the assumption that people make rational decisions based on the desire to increase their economic well-being. While economists have long known that isn’t strictly true, Thaler was a pioneer in studying why people sometimes make irrational decisions, and how they can be encouraged to make smarter ones.
“He’s made economics more human,” said Peter Gärdenfors, a member of the commitee that awarded the prize.
Thaler, 72, of the University of Chicago, told the press that the most important value of his work was the understanding that “in order to do good economics, you have to keep in mind that people are human.”
His work is well known outside academic circles. He made an appearance in the film “The Big Short,” in a scene at a blackjack table with pop star Selena Gomez, to explain mortgage bonds. His 2008 book “Nudge: Improving Decisions About Health, Wealth and Happiness,” which he wrote with law professor Cass Sunstein, became a popular hit.
They argued that by understanding how people make decisions, behavioral economics can be used to tackle many of society’s major problems and influence public policy. Both The Economist and the Financial Times ranked it the best book of the year.
It also influenced how governments made decisions. In 2010, the U.K. established a Behavioral Insight Team, what became known as the Nudge Unit, to create policies to nudge British citizens to make better choices that would save the state money. Thaler was an adviser.
And the Obama administration issued an executive order in 2015 titled “Using Behavioral Science Insights to Better Serve the American People.”
It encouraged executive departments and federal agencies to “identify policies, programs, and operations where applying behavioral science insights may yield substantial improvements in public welfare, program outcomes, and program cost effectiveness.”
His theory 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,” the Royal Swedish Academy of Sciences said.
The Royal Academy every year awards the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Americans, especially from the University of Chicago, have dominated the award.
Thaler is the 29th winner of the economics prize associated with the school in the 49 years the award has been given. The most recent winners were Eugene Fama and Lars Peter Hansen, who shared the 2013 award with Robert Shiller. George Stigler, Milton Friedman and Paul Samuelson were among the most famous winners from Chicago.
Thaler joked on Monday that one upshot of winning was that he no longer has to call his friend “Professor Fama” when they play golf together.
Last year, two foreign-born American professors were awarded the prize for their contributions to contract theory — the agreements that shape business, finance and public policy.
The winners were Oliver Hart, now 69, a British born economist teaching at Harvard, and Bengt Holmström, 68, a Finnish economist teaching at MIT.
Hart’s research had found that that privatizing government functions such as schools, hospitals and prisons lead to a reduction in quality greater than the advantages of cost savings. Holmström’s research focused on employment contracts, including between CEOs and shareholders.
The 2013 award winner Shiller, known for his work on bubbles in financial and real estate markets. His name is on a closely followed measure of U.S. home prices.
And the 2008 prize went to Paul Krugman, a liberal columnist for The New York Times and a Princeton professor who won for his work on trade patterns and location of economic activity.
CNNMoney (New York) First published October 9, 2017: 5:56 AM ET
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