Many of you must have heard of ‘endowment bias’ – paying a dearly price to retain something; at times, more than the cost of new one. In other words, people often make choices that don’t serve their best interests.
The man who coined endowment bias and other such concepts, Richard Thalerhas won Nobel Economics Prize.
Thaler has authored bestsellers such as Nudge, The Winner’s Curse and Quasi Rational Economics. The principles enunciated in these books have great relevance for behavioural finance.
Thaler studies behavioural economics and finance as well as the psychology of decision-making which lies in the gap between economics and psychology. He investigates the implications of relaxing the standard economic assumption that everyone in the economy is rational and selfish, instead entertaining the possibility that some of the agents in the economy are sometimes human.
“Thaler is considered a founding father of behavioral economics, a field that shows that far from being the rational decision-makers described in economic theory, people often make choices that don't serve their best interests. That could include, for example, refusing to cut their losses when their investments plunge in value or making big bets at the casino because they are convinced their hot streak will continue. The illogical behavior has economic consequences: People spend more than they should and don't save enough for retirement. They make investments — in houses in the mid-2000s, for instance — when prices are already dangerously high,” says a report published in US News.
“By exploring the consequences of limited rationality, social preferences, and lack of self-control, he has shown how these human traits systematically affect individual decisions as well as market outcomes,” said a release issued by The Royal Swedish Academy of Sciences.
Thaler was born in New Jersey, USA in 1945. He pursued PhD from the University of Rochester. Currently, he is the professor of Behaviour Science and Economics at the University of Chicago.