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Friday, 13 October 2017

Behavioural economics goes mainstream with Richard Thaler’s Nobel Prize

The Nobel prize for Economics (technically, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) has previously been awarded to academics working in the field of decision-making, psychology and economics (Herbert Simon in 1978 and Daniel Kahneman in 2002). But the announcement last week that the 2017 prize would go to Richard Thaler, was the first which explicitly mentioned the award being for contributions to behavioural economics."

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.”

Thaler’s research was praised for incorporating psychological assumptions into analyses of economic decision-making, his work showing 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.  The Royal Swedish Academy of Sciences described Thaler as a pioneer of behavioural economics, saying that it had progressed in recent years from a fringe and somewhat controversial field of research into “a mainstream component of the economics profession.

Behavioural economics and me

Ten years ago media images showed queues of anxious depositors in British high streets as the crisis at Northern Rock, the first run on a British bank for around a century, became the clearest sign that all was not well in the financial system. A year later, the collapse of Lehman Brothers signalled the full blown emergence of the Global Financial Crisis. These momentous financial events coincided with my new job as an economics lecturer at Brighton Business School, University of Brighton. Economics 101, which I was teaching to first year undergraduates, was hard-pressed to explain the most momentous economic events in living memory. Which was why I turned to other schools of thought, including behavioural economics, launching what turned out to be a series of popular modules on the subject.

Rethinking economics and behavioural economics

Fast forward a few years, and I was invited by the folks at Rethinking Economics to contribute a chapter on Behavioural Economics to a forthcoming reader, aimed at providing an accessible introduction to different approaches to economics and highlight the diversity of economic thought.  The book, which has just been published, introduces new and diverse ideas into undergraduate economics and places the mainstream of economic thought side by side with more heterodox schools. 

According to the publishers, Rethinking Economics: An Introduction to Pluralist Economics is “a great entry-level economics textbook for lecturers looking to introduce students to a broader range of economic ideas, and is  accessible for people outside academia who are interested in economics and economic theory. Can’t say fairer than that.

The Table of Contents from the Reader is a roll-call of alternative economics:

·       Post-Keynesian Economics
·       Marxist Economics
·       Austrian Economics
·       Institutional Economics,
·       Feminist Economics
·       Complexity Economics
·       Co-operative Economics
·       Ecological Economics
·       And my chapter on Behavioural Economics

According to Richard Thaler’s Nobel Prize citation, behavioural economics has become “a mainstream component of the economics profession.” It’s going to be interesting to see if the rest of the “economics profession” agrees!