2017 Nobel Memorial Prize in Economic Sciences
Reason for Award
for his contributions to behavioural economics
Laureates
United States of America
Explanation
When we think about money, people do not always calculate perfectly. Richard Thaler is a scholar who studied how feelings guide spending and saving. He showed an idea called “mental accounting,” where the same one dollar feels different in a pocket and in a piggy bank. He also created the idea of a “nudge,” small changes in how choices are shown that guide people to better actions. His work helps kids learn to use money wisely and helps society design kinder rules.
Related Keywords
behavioral economics
Behavioral economics explains systematic departures from the fully rational agent assumed in classical economics by using insights from psychology. It investigates how cognitive biases, emotions, and social norms shape decisions through theory, laboratory experiments, and field studies. By modelling consumption, saving, investing, and labour supply more realistically, it offers new guidance for policy design. Richard Thaler, Daniel Kahneman, and Robert Shiller are among its founders. The field now spreads rapidly into public policy, marketing, and financial regulation.
bounded rationality
Bounded rationality, coined by Herbert Simon, recognises that limited cognitive resources prevent people from full optimisation. Thaler provided empirical evidence on how cue-dependence and heuristics distort choices. The concept explains “decision fatigue” and misjudgements under information overload. Policy implications include improved choice architecture and defaults that simplify decisions. It challenges traditional models assuming perfect optimisation and forms a cornerstone of behavioural economics.
mental accounting
Mental accounting is Thaler’s theory that people divide money into separate psychological “accounts.” This categorisation eases decision-making but can create inefficiency by reducing fund flexibility. A classic example is refusing to tap long-term savings while taking high-interest consumer loans. Because each account has its own reference point, the same amount can feel like a gain in one account and a loss in another. Policy designs that lower transfer costs across accounts can improve welfare.
nudge
A nudge is a choice-architecture device that steers behaviour toward desirable outcomes while preserving freedom of choice. Proposed by Thaler and Sunstein, it supports self-control through clever defaults and information framing. Automatic pension enrolment is a flagship example, sharply raising participation and savings. Because it is non-coercive, it respects autonomy yet increases social welfare. Many governments now host “nudge units” applying the method to taxation, health, and environmental policy.
loss aversion
Loss aversion is the bias whereby the pain of a loss exceeds the pleasure of a comparable gain. Thaler’s experiments showed its profound impact on market trades and pricing. The endowment effect—demanding a higher price to give up an owned good—reflects loss aversion. Investors’ reluctance to sell losing stocks, known as the disposition effect, follows the same mechanism. Accounting for loss aversion improves tax design and insurance demand analysis.