Psychological insights to the world of finance wins Nobel Prize

9th Oct 2017

Research on the influence of psychology on financial decision-making has led to a Nobel prize for US economist Richard Thaler.

Economic decisions that are driven by profit margins, losses, and market climates are also affected by psychological phenomena, as evidenced by the work of Nobel prize winner Richard Thaler.

Thaler’s work, which has contributed to the new field of behavioural finance, investigates the effect of human rationality and fairness on economic predictions.

His work has shown how humans oversimplify predictions by compartmentalising economic decisions, and not considering the overall effect of several factors. The research has contributed to a better understanding of how to predict future economic events.

Experimental work by Thaler has also provided insights into the cultural differences of decision making in behavioural economics.

Decision-making, which is thought to be controlled by several brain regions including the anterior cingulate cortex and the ventromedial prefrontal cortex, is affected by human psychosocial traits such as empathy and perception of fairness.

He also brought to prominence the “nudge” theory, which uses subtle positive reinforcement techniques to direct consumer, or even voter, behaviours to comply with certain opinions.

Read more on Thaler’s prize-winning work online.