The American economist Richard Thaler was awarded the 2017 Nobel Prize in Economics for his contributions to behavioral economics. This paper systematically reviews the main contributions to the development and application of behavioral economics made by Thaler in the process of integrating economics and psychology. Firstly, we briefly overview Thaler’s academic career and major works, highlighting the role played by Thaler in the making of behavioral economics and the transition of behavioral economics from an interdisciplinary subject to a branch of mainstream economics. Secondly, based on an overview of the three basic elements of behavioral economics, namely bounded rationality, bounded willpower and bounded self-interest, we emphasize the main contributions made by Thaler to the theories and applications of mental accounting, time preference inconsistency and the problem of self-control as well as fairness and social preference. Specifically, Thaler used loss aversion to explain the endowment effect, developed mental accounting to explain how people make financial decisions by creating different accounts for different expenditures in their minds, and then examined how such mental accounting leads to desirable and undesirable effects; he provided evidence of time-inconsistent preference, developed the planner-doer model to analyze the self-control problem and then applied to the design of savings plan; Thaler documented the characteristics of fairness through experiments and surveys and explored the role that fairness played in the economic life. These contributions consist of the basic elements of behavioral economics on which the framework of behavioral economics is established. Thirdly, we discuss how Thaler responded to the challenges raised by traditional financial economists when applying behavioral economics to finance, and review the main researches to establish the two building blocks of behavioral finance, namely investor psychology and limited arbitrage, which makes Thaler one of the founders of behavioral finance. Specifically, Thaler’s contributions to investor psychology on asset prices included his documentation of the evidence of overreaction and his new explanation of equity premium puzzle based on myopic loss aversion; and his contributions to limited arbitrage included his examination of closed-end fund puzzle and the negative equity value. Finally, Some characteristics of the research of Thaler and the theoretical significance and practical value of behavioral economics is discussed. Thaler is skilled at observing the difference of theory and reality and finding out the theory-induced blindness; more importantly, he is good at using suitable situation to demonstrate the effect of different human traits. Thus, Thaler’s contributions have important implications for economic research and education. Moreover, we discuss the implication of Thaler’s contributions to economic transition, of which we pay special attention to potential value nudging in promoting the modernization of national governance system and governance capacity.
The Integration of Economics and Psychology and Extension of Behavioral Economics with Applications——A Review of Main Contributions by 2017 Nobel Economics Laureate
Foreign Economics & Management Vol. 39, Issue 11, pp. 138 - 152 (2017) DOI:10.16538/j.cnki.fem.2017.11.010
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Cite this article
Li Baoliang, Guo Qiyou. The Integration of Economics and Psychology and Extension of Behavioral Economics with Applications——A Review of Main Contributions by 2017 Nobel Economics Laureate[J]. Foreign Economics & Management, 2017, 39(11): 138–152.