The importance of context also arose in Mr Thaler's work on “mental accounting”.
In thinking about money, people tend to compartmentalise, grouping certain types of spending or income together.
In some cases this might amount to a strategy for managing imperfect self-control (as in the credit-card debt example).
More broadly, it reflects the human tendency to tackle cognitive problems in pieces, rather than as a whole.
When petrol prices fall, for example, drivers sometimes switch from regular-grade petrol to premium (rather than use savings out of the “petrol” category somewhere else).
Because of this mental pigeonholing, taxi drivers who aim to earn a certain amount each day may stop work early on busy days and later on slow ones, though the opposite approach would maximise earnings per hour.
Mr Thaler, with his colleague Hersh Shefrin, understood choices as battles between two competing cognitive forces: a “doer” part of the brain focused on short-term rewards, and a “planner” focused on the long term.
Willpower can help suppress the doer's urges, but exercising restraint is costly.
This internal struggle is continuous, so individual preferences are not constant over time (whether you have another beer may depend on the state of the brain at a given moment).
It also means that presenting people with a “choice architecture” which favours the planner over the doer can have big effects on behaviour.
That insight became the basis for “nudging”.