After US academic Richard Thaler wins Nobel prize in economics for pioneering work, we take a closer look at his field

Behavioural economics incorporates the study of psychology into the analysis of the decision-making behind an economic outcome, such as the factors leading up to a consumer buying one product instead of another.

The US academic Richard Thaler won the Nobel prize in economics on Monday for his pioneering work in this field. The Royal Swedish Academy of Sciences, which awarded the £845,000 prize, praised Thaler for incorporating psychological assumptions into analyses of economic decision-making.

Unlike the field of classical economics, in which decision-making is entirely based on cold-headed logic, behavioural economics allows for irrational behaviour and attempts to understand why this may 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.

Brexit is one example of how behavioural economics can be useful. Thaler has suggested that the theory can help explain how the narrow vote to leave the EU was influenced by gut choices, as opposed to rational decision-making.



The theory is particularly useful for companies and marketers looking to increase sales by encouraging changes in behaviour by consumers. It can also be used for the purposes of setting public policy.

Thaler is particularly well known for his work on “nudge theory”, a term he coined to help explain how small interventions can encourage individuals to make different decisions. Nudges can, however, be manipulative, to the detriment of individuals.

Here are some examples of nudge theory:



Supermarkets

Thaler suggests changes can be made to an individual’s “choice environment” to influence their behaviour. The best example of this comes in the supermarket, where attention can be drawn to certain products to encourage consumers to spend money.

Organ donation

Thaler has examined the use of inertia and the power of default arrangements in permissions for organ donation.

Theresa May is considering a system of presumed consent – which would mean individuals are presumed to agree to the use of body parts after death unless they opt out – in a policy that was central to her speech at the Conservative party conference in Manchester last week.

Tax reminders

The Whitehall nudge unit helped to rewrite tax reminder letters using principles of behavioural economics, which it said helped to bring forward more than £200m for the government in one year.

E-cigarettes

The behavioural insights team worked with Department of Health on the regulatory framework for e-cigarettes, viewing the devices as potentially beneficial in helping smokers to quit. It advised the government that it is much easier to substitute a similar behaviour than to eliminate an entrenched one. More than 2.3 million people are now vaping.