Have a hard time keeping up with your New Year's resolutions? Find it impossible to pass up a good sale even if you're low on cash? Refuse to pay for an overpriced drink when you're thirsty? If so, you've effectively broken the laws of traditional economics, but you've also confirmed over 40 years of research by American economist Richard Thaler.
Thaler, who is considered the "father of behavioral economics," received the Nobel Memorial Prize in Economic Science on Monday for his work on integrating economics with psychology. Thaler's research has helped economists understand that "human behavior often contradicts traditional economic logic," reports a University of Chicago publication, where Thaler teaches.
In his award citation, the prize committee focuses on three aspects of human psychology that Thaler's work explores:
- "cognitive limitations," which keep people from acting rationally
- "self-control problems," which prevent people from following through with plans
- "social preferences," which dictate whether people act out of selfishness or selflessness
Harvard professor Brigitte Madrian, who researches behavioral economics and household finance, tells CNBC Make It that recognizing these tendencies is very important when making decisions about how to invest your time and money.
While it's hard to overcome some of these tendencies outlined in Thaler's research, Madrian says, "the key is to recognize your shortcomings and then try to set yourself up to limit their effects when you're not in a vulnerable situation."
"Knowing what some of the traps are so that you can avoid them might not solve all of your financial woes, but it can make things better," she says.