Nobel Prize-Winning Behavioral Economics: A Window into the Human Mind

By Sheeva Azma

As a neuroscientist who researched human decision-making and cognitive mechanisms for over a decade, I have always found economics boring.  While my MIT classmates were learning about micro and macroeconomics, I was studying about neuroplasticity and the latest technologies in neuroimaging.

Maybe it’s ironic, then, that I studied neuroeconomics as a graduate student.  At the time, though, I did not think of my research as a subfield of economics, but as a subfield of neuroscience.  As a graduate student studying neuroscience at Georgetown, one of my projects looked at the brain’s decision-making mechanisms as related to rewards — a subfield of neuroscience called neuroeconomics.  Learning about the new field of neuroeconomics was life-changing for me.  It opened my mind to a new world, one in which humans were struggling to make the right decisions to live the best lives possible.  I never really equated my work to economics as a discipline — but my graduate research was built upon the foundations of behavioral economics just as it was from the contributions of people like Santiago Ramón y Cajal, the “Father of Neuroscience” who won the 1906 Nobel Prize in Physiology and Medicine with his colleague, Camillo Golgi.  

Recently, realizing that avoiding an entire discipline is tantamount to ignorance, I recently watched some of the lectures at MIT OpenCourseWare for their “Principles of Microeconomics.”  While I still find economics tedious, I found Prof. Gruber’s take on economics and the world to be pretty cool, actually — and I learned that economics can actually be somewhat useful, especially in an uncertain world such as the one we live in today.

More people need to know about how economics can be used for the betterment of humankind, whether via behavioral economics, or taking it one step further to studies of the human brain as I did in my neuroeconomics research. That’s why I decided to write this post on behavioral economics.  Read on to learn more about the field of behavioral economics and how it has revealed novel insights about human decision making.

What Is the Nobel Prize in Economics, Anyway?

When Alfred Nobel established the different Nobel Prizes in his will, he did not include the Economics prize.  Actually, what is often called the Nobel Prize in Economics, which is awarded annually by the Nobel Foundation since 1969, was created thanks to a donation to the Nobel Foundation by Sweden’s central bank, Sveriges Riksbank.

The Nobel Foundation awards The Sveriges Riksbank Prize in Economic Sciences annually in honor of Alfred Nobel.

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What Is Behavioral Economics?

As Harvard Business Review writes, behavioral economics is a relatively new field, one that combines research from “psychology, judgment, and decision making” with economics “to generate a more accurate understanding of human behavior.”

Behavioral economics tries to figure out whether economists’ assumptions about the world are actually representative of human behavior.  Decades of research shows that humans do not make rational decisions and seek to maximize their own satisfaction rather than their resources.  For example, a phenomenon called delay discounting (which is not unique to people, as pigeons also do it) reveals that, when making financial decisions, humans seek to maximize immediate profits.  When given a choice between a smaller, sooner reward and a larger, later reward, most people select the immediate reward rather than wait for something better in the long-term.

Decades of research shows that humans do not make rational decisions and seek to maximize their own satisfaction rather than their resources.

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Delay discounting is why it’s so difficult to start a new diet — a delicious piece of cake is much more immediately satisfying than a gym regimen, even though the long-term health and physical fitness effects of the gym regimen are much longer-lasting than a simple slice of cake.  Delay discounting can explain a lot of human choices, from procrastinating studying for an exam to even alcohol and drug use.

Behavioral economics is really useful because if scientists can figure out how humans are truly behaving and what factors are weighing into their decisions, we can solve a lot of problems by accounting for these irrationalities in decision-making.  As Shahram Heshmat, Ph.D. of Psychology Today writes, “behavioral economics can provide valuable insight that individuals are not behaving in their own best interests.”

Behavioral economics is really useful. If scientists can figure out both how humans really act and what factors weigh into their decisions, we can solve a lot of problems by accounting for these irrationalities in decision-making.

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Behavioral Economists Who Have Won The Nobel Prize

The Nobel Prize for economics has been awarded to many people who could be considered behavioral economists, such as:

• Robert Fogel.  Fogel, along with Douglass C. North, won the Nobel Prize in Economic Sciences in 1993 for his work using economics to better understand history.  His work studied the role of railways in the development of the U.S. economy.  Fogel’s work also looked at the economic aspects of slavery as a way to understand why the South was so reluctant to abandon it, which led to the Civil War, the most gruesome war in American history.

• George Akerlof.  Akerlof won the 2001 Nobel Prize in Economic Sciences with two other economists (Joseph Stiglitz and Michael Spence) for his study of “markets with asymmetric information.” Asymmetric information is also known as “information failure” and occurs when one party knows more about a product than the other party.  Information failure commonly occurs when a seller of a product knows more about it then the buyer.  As IZA Institute of Labor Economics explains, this occurs in used car sales.  Used car sellers often withhold better cars, and sell lower-quality cars for higher prices.  

• Daniel Kahneman.  Combining the insights from economics with human cognitive science, Kahneman was able to gain insight into human decision making under uncertainty.  This work led to Kahneman’s 2002 Nobel Prize in Economics, which he shared with another economist, Vernon Smith.
  
• Elinor Ostrom.  The first woman to win a Nobel Prize in Economics in 2009, Ostrom studied how organizations best govern themselves.  Not an economist by training, Ostrom was a political scientist.  She based her research on case studies rather than theoretical models.  “She studied arrangements in irrigation, fisheries, and forest use in a wide range of countries, including Nepal, Spain, Indonesia, Nigeria, Bolivia, Sweden, and the United States,” writes The Library of Economics and Liberty.
  
• Robert Shiller.  Shiller won the 2013 Nobel Prize jointly with Eugene Fama and Lars Peter Hansen for his contribution to behavioral economics. Shiller insists that humans’ inability to act rationally derives from what are called “heuristics” — shortcuts that work well in the short-term but not in the long term.
  
• Richard Thaler.  The 2017 recipient of the Nobel Prize in Economic Sciences, Thaler is known for his contributions to the field studying decision-making, self-control, and how cognitive limitations influence financial markets. He coined the term “nudging,” which refers to the use of positive reinforcement and indirect suggestion to improve human decision-making and overcome the inherent irrationality of human decision making.  For example, a “nudge” might remind you about the importance of making healthy food choices, or help you put away your cell phone when driving.

What Is the Future of Behavioral Economics?

As Michelle Baddeley writes in the MIT Technology Review, many outstanding questions remain in this nascent field.  Most behavioral economics, like the topics I studied in my graduate studies, relate to microeconomics — the subfield of economics dedicated to the effects of individual decisions.  There is a lot of progress yet to be made in another subfield of economics called macroeconomics.  Macroeconomics looks at the behavior and performance of an economy as a whole — things like unemployment, gross domestic product, and inflation.

One question that remains to be answered is: Can insights gleaned from microeconomics be applied to macroeconomics?  It remains unclear “how robust and scalable nudging policies really are,” as Baddeley writes, but “there has been progress in this direction.”  Thanks to new computer modelling technologies such as machine learning, new behavioral models can be gleaned which can answer more questions in the field of behavioral economics.

Sources:

1. Baddeley, Michelle. Behavioral economics: Past, present, and future. MIT Technology Review. 10 Oct 2019. https://www.technologyreview.com/2019/10/10/65182/behavioral-economics-past-present-and-future/
2. Bloomenthal, A. Asymmetric Information. Investopedia. 7 Apr 2020. https://www.investopedia.com/terms/a/asymmetricinformation.asp
3. Camillo Golgi – Facts. NobelPrize.org. Nobel Media AB 2020. Sat. 26 Sep 2020. https://www.nobelprize.org/prizes/medicine/1906/golgi/facts/
4. Daniel Kahneman – Facts. NobelPrize.org. Nobel Media AB 2020. Sat. 26 Sep 2020. https://www.nobelprize.org/prizes/economic-sciences/2002/kahneman/facts/
5. Elinor Ostrom. Econlib. Sat. 26 Sep 2020. https://www.econlib.org/library/Enc/bios/Ostrom.html
6. Elinor Ostrom – Biographical. NobelPrize.org. Nobel Media AB 2020. Sat. 26 Sep 2020. https://www.nobelprize.org/prizes/economic-sciences/2009/ostrom/biographical/
7. George A. Akerlof. IZA Institute of Labor Economics. Sat. 26 Sep 2020. https://www.iza.org/person/286/george-a-akerlof
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9. Gino, Francesca. The Rise of Behavioral Economics and Its Influence on Organizations. Harvard Business Review. Sat. 26 Sep 2020. https://hbr.org/2017/10/the-rise-of-behavioral-economics-and-its-influence-on-organizations
10. Heshmat, S. What Is Behavioral Economics? Psychology Today. Sat. 26 Sep 2020. https://www.psychologytoday.com/us/blog/science-choice/201705/what-is-behavioral-economics
11. Macroeconomics. The Economic Times. IndiaTimes.com. Sat. 26 Sep 2020. https://economictimes.indiatimes.com/definition/macroeconomics
12. MIT Open Courseware. Principles of Microeconomics. MIT.edu. Sat. 26 Sep 2020. https://ocw.mit.edu/courses/economics/14-01sc-principles-of-microeconomics-fall-2011/
13. National Bureau of Economics. Fogel and North Shared Nobel Prize in Economics. Sat. 26 Sep 2020. https://www.nber.org/nobelarchive/nobel1993.html
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15. Pisani, B. Robert Shiller says economic stories like fears of a recession can go viral and be self-fulfilling. CNBC. 16 Oct 2019. https://www.cnbc.com/2019/10/16/robert-shiller-says-economic-stories-like-fears-of-a-recession-can-go-viral-and-be-self-fulfilling.html
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18. Robert W. Fogel – Biographical. NobelPrize.org. Nobel Media AB 2020. Sat. 26 Sep 2020. https://www.nobelprize.org/prizes/economic-sciences/1993/fogel/biographical/
19. Robert J. Shiller – Biographical. NobelPrize.org. Nobel Media AB 2020. Sat. 26 Sep 2020. https://www.nobelprize.org/prizes/economic-sciences/2013/shiller/biographical/
20. Shiller, R. Richard Thaler is a controversial Nobel prize winner – but a deserving one. The Guardian. 11 Oct 2017. https://www.theguardian.com/world/2017/oct/11/richard-thaler-nobel-prize-winner-behavioural-economics
21. The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. NobelPrize.org. Nobel Media AB 2020. Sat 26 Sep 2020. https://www.nobelprize.org/prizes/economic-sciences/