One of the founders of behavioral finance, which studies how cognitive limitations influence financial markets, Thaler developed a model for explaining how people tend to focus on the narrow impact rather than the overall effect of each decision they make, which is called limited rationality.
Thaler has also shed new light on the old observation that New Year's resolutions can be hard to keep.
Mr. Sunstein, a Harvard University professor and former White House official under President Barack Obama, called his friend "the Charles Dickens of the economics profession, because he has a sense of human foibles", and someone who "has really revolutionized how economists think about people".
Brexit, according to Thaler, is a prime example of irrational behaviour.
His work had even earned him a cameo appearance in the 2015 movie "The Big Short".
The theory put forward in this book talks about how small incentives can push people into making certain decisions.
He's the director of the Center for Decision Research, and is the co-director, with now fellow Nobel laureate, Robert Shiller, of the Behavioral Economics Project at the National Bureau of Economic Research. But over the past few decades, behavioural economists like Richard Thaler have progressively chipped away at this notion. The Nobscar? To Al Gore (a Peace prize laureate and an Oscar victor for "An Inconvenient Truth") can we now add University of Chicago professor Richard Thaler?
Thaler "is a pioneer in behavioral economics, a research field in which insights from psychological research are applied to economic decision making", a background paper from the academy said. Most of the winners have been men from the United States or Western Europe. George Stigler, Milton Freidman and Paul Samuelson were among the most famous winners from Chicago.
Last year, British-born economist Oliver Hart and Finnish economist Bengt Holmstrom were honoured for their work on contracts.
The 2013 award victor Shiller, known for his work on bubbles in financial and real estate markets.
Nobel season reaches its grand finale on Monday with the announcement of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, better know as the Nobel in economics.