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Richard H. Thaler has been awarded the 2017 Nobel Memorial Prize in Economic Sciences, and as has been widely reported, quipped that he would spend the prize money “as irrationally as possible.” Is that any way for an economist to talk? It is for Thaler, who is being honored “for his contributions to behavioural economics,” according to the official Nobel Prize website. Thaler teaches at the University of Chicago Booth School of Business and is best known for his book Nudge: Improving Decisions About Health, Wealth, and Happiness. His basic premise is that people are predictably irrational, “that they consistently behave in ways that defy economic theory.”
It’s an idea he’s been researching for some time. Back in 2008, Thaler published a paper along with Thierry Post, Martijn J. van den Assem, and Guido Baltussen, called “Deal or No Deal? Decision Making Under Risk in a Large-Payoff Game Show”:
We examine the risky choices of contestants in the popular TV game show “Deal or No Deal” and related classroom experiments. Contrary to the traditional view of expected utility theory, the choices can be explained in large part by previous outcomes experienced during the game. Risk aversion decreases after earlier expectations have been shattered by unfavorable outcomes or surpassed by favorable outcomes. Our results point to reference-dependent choice theories such as prospect theory, and suggest that path-dependence is relevant, even when the choice problems are simple and well-defined, and when large real monetary amounts are at stake.