The Limits of Behavioral Economics

Interesting: George Loewenstein, one of the pillars of the behavioral economics movement, co-authors a Times op-ed highlighting the field’s limitations. Highlight:

As policymakers use it to devise programs, it’s becoming clear that behavioral economics is being asked to solve problems it wasn’t meant to address. Indeed, it seems in some cases that behavioral economics is being used as a political expedient, allowing policymakers to avoid painful but more effective solutions rooted in traditional economics.

Several years ago, I wrote about a conference where the leading lights of behavioral economics made their case to the Federal Reserve Bank of Boston. Loewenstein was easily one of the most powerful presenters. I do not read his op-ed as a sign of capitulation in the least, but rather of the field’s potential strength — for there is little long-term value in overpromising and underdelivering.

FWIW, we threw a few stones at the behavioral glass house in SuperFreakonomics.


Tzimiskes

That's funny, I titled a post for my blog this morning the exact same thing. My take and direction on it are different, I'm writing a political blog not an ecnomic one, just thought I'd share because of the coincidence.

http://tzimiskes.blogspot.com/2010/07/limits-of-behavioral-economics.html

Dave

i think the article was unfair to the extent that it argued against behavioral economics being a panacea when no one ever said it was.

otherwise it just reiterates politicians don't make the tough choices. tell me something i don't know.

matt

some valid points, overall, despite some wonky examples. though, economics in general, is much more guilty of what the article proclaims behavioral economics falls short of.

Ian Kemmish

I'll admit to always having been sceptical about BE, since it seems to be very good at providing post hoc narrative explanations of stuff, but weak on providing testable predictions.

Nonetheless, I find it intriguing that he chooses inefficient cars as an example of where BE doesn't help. I don't think anyone could accuse the UK of having low fuel prices, yet we definitely have an epidemic of unnecessary SUVs or "Chelsea tractors" as they're sometimes known here. Clearly Brits' reasons for driving inefficient cars have nothing to do with fuel price.

Maybe it's like Dostoevky's Prince Valkovsky - conspicuous consumers do it because they enjoy the anger it provokes in others.

Or maybe, like in the village of Gamlingay near here, they need SUVs because they're persuaded the Parish Council to build so many speed bumps that the locals now need SUVs in order to still be able to drive around at full speed.

Either way, the explanation seems to be closer to the realms of BE than ordinary economics. The fact that BE can't predict a good way out of that behaviour, other than by appealing to conventional economics is - to me at least - no great surprise.

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Drill-Baby-Drill Drill Team

The limits of Behavior Economics are effected by naturally occuring mental illness of the population...and that is a BIG miscalculation. Up to 40% of all Americans will have a diagnosable Mental Illness at some point in life whether alcoholism, drug addiction, depression, obscessions, schizophrenia or personality disorders.

Take for instance Schizophrenia. They are up 2-4% of the world. They are very common; You Know them. See any homeless in the alleys this morning on your way to work?

They DO NOT think or behave rationally. And will muck up any model that depends on self interest like the 'Market'. They disporportiontely are involved in crimes like Non Premediated Murder, Asssasinations, Bombings and Suicides.

How does Behavioral Economics deal with the Non Rationals and Misbehavioral Economics? Every try to get an alcoholic to quit?

professional pricer & marketer

You may be right about this being a sign of the future potential, and more an excercise in setting expectations at a reasonable level than a capitulation, but nevertheless I was surprised by the angle that he took, as I see this as misstating or at least oversimplying the limitations of BE.

"Behavioral economics should complement, not substitute for, more substantive economic interventions. If traditional economics suggests that we should have a larger price difference between sugar-free and sugared drinks, behavioral economics could suggest whether consumers would respond better to a subsidy on unsweetened drinks or a tax on sugary drinks. "

The point is not (or should not be) that education alone can fix illogical decisions. but the fact that consumer preferences are not fixed facts controlled only by price and can be manipulated. This is a fact well known to marketers and in practice since the earliest days of capitalism. Traditional economics makes no value judgements and implies that the "best use" of a material is a thing that is completely outside of the control of people to determine, and that the free market will determine this based on supply / demand. the price / quality preference curve clearly has two levers which can be modified. Price and Quality. Since price is (for the most part) objective, it is easy to influence, but quality is 100% a subjective opinion, so it can and should be considered another lever to pull, whereas he is implying (in the quote above) that it should only be used as a way to evaluate how to pull the other lever. I completely disagree. both tools are valid, but the real challenge in manipulating perception is that it puts policy makers in direct competion with corporate marketing departments, who have much more experience. Pepsi's marketing budget is much higher than New York's budget to educate people about eating badly. But there is a reason for that. Companies spend that much because it's more effective than simply lowering the price by the same amount. If your policy is only about taxes and subsidies, it will be a much more expensive policy to get the same result.

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Julien Couvreur

Behavioral Economics are important in one area though: they rightly point out that mainstream economists make unrealistic assumptions about people (some notion of perfect rationality, information and forecasting).

W.M.

"Behavioral Economics"? Is there really any other kind?

blb

I'm always frustrated with writers who seem to expect one group of folks or another to act outside the boundaries of the theory they construct. For instance, aren't the politicians and business/professional leaders the authors condemn for their unwillingness to act actually "bound by" the same behavioral or economic "rules" that apply to the rest of us? Wouldn't the authors' point be much stronger if they explained the intrenchment of these groups and provided BE or E based strategies for change?

S. Heaton

Psychologists are hopelessly wedded to lab experiments while economists have been so theoretically limited in their understanding of human information processing that both have collectively become lousy social scientists.

List often has a tendency to try and kill psych effects for the sake of killing them, but he is one economist who knows more psychology (and social science) than most psychologists.

The real geniuses of social science were folks like Gordon Allport, who did amazing field work and care about underlying processes. It's amazing to think about what folks in the 1950s-1960s accomplished without very much technology.

We're all doing derivative work by comparison.

- S.H.

John R

Thought you might appreciate this: A pay-to-sit bench.

http://dvice.com/archives/2010/07/meanest-bench-e.php

Cyril Morong

Here is a letter to the editor of the Chronicle of Higher Education I write that got printed.

"I enjoyed Evan R. Goldstein's "The New Paternalism" (The Chronicle Review, May 9) about Richard H. Thaler and Cass R. Sunstein, authors of Nudge. Who could disagree that "human perception is flawed," or that we all have "cognitive limitations"? This suggests enacting policies that "nudge" people in the right direction.

But it seems like a straw man is being used when Thaler and Sunstein say that policy makers previously assumed that all people can think like Albert Einstein and can exercise the patience of Mahatma Gandhi. Surely no neoclassical economist would believe that. Even Milton Friedman, in Capitalism and Freedom, said that "there is no avoiding the need for some measure of paternalism." But he also said that the principle that "some shall decide for others" is very troubling and that "there is no formula that can tell us where to stop."

Coincidentally, Alan Wolfe summarized John Stuart Mill's view in the same issue: "The purpose of liberty is not to give us what we want but to help us grow so that we can best understand our wants" ("The Forgotten Philosopher," The Chronicle Review). Let us hope that the "new paternalism" does not end up stifling such human growth. In understanding our wants, we get to know ourselves. If someone else is always nudging us in the right direction, we will never figure anything out on our own."

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Nonetheless, I find it intriguing that he chooses inefficient cars as an example of where BE doesn't help. I don't think anyone could accuse the UK of having low fuel prices, yet we definitely have an epidemic of unnecessary SUVs or "Chelsea tractors" as they're sometimes known here. Clearly Brits' reasons for

Josh

The big opportunity for BE is to provide a new paradigm for the government/collective taking a sensible role in the economy.

The market is a super powerful thing, but it has very serious and by now somewhat known limitations. Sadly, we hare mired in the sclerotic after effects of the socialism/liberalism intellectual culture war. It pollutes everyone's thinking on the issue surrounding economics and large collections of people.

The government wouldn't need to worry as much about issues like redistribution/lifestyle maintenance (mortgage subsidy, welfare, etc.) , if it simply focused on filling in the gaps where the market does not function and protecting people from large holes in their reasoning.

There is still room for monopoly destruction (It makes no sense that Comcast owns the pipes and leads to all sorts of inefficiency) and some other traditional functions of course.