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ECONOMICS

The theory of mental accounting

ICAN/FLICKR Richard H. ThalerICAN/FLICKR

American economist Richard H. Thaler, 72, was awarded the Nobel Prize for his pioneering studies in the field of behavioral economics. Professor emeritus of economics and behavioral sciences at the University of Chicago, USA, Thaler incorporated psychologically realistic assumptions into analyses of economic decision-making and developed the theory of mental accounting. His analyses consider three psychological traits that systematically influence people when making economic decisions: limited rationality, social preferences, and lack of self-control. According to his theory of mental accounting, people simplify their financial decisions and create separate accounts in their minds, contemplating the small impact of each individual financial decision rather than its overall effect. Another important theme he has explored is the internal tension between long-term planning (such as saving for retirement) and short-term doing (buying products for immediate satisfaction). In this context, Thaler has demonstrated how the concept of nudging—sometimes described as the architecture of choice—can encourage people to make a certain decision without any direct incentive or coercion to do so.

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