Behavioural economics, 1892 version

Well I’ve read Paul Mason’s and can’t write about it because I’ve agreed to do a review elsewhere, and I’ve read Dani Rodrik’s and can’t write about that because it’s embargoed until the autumn.

[amazon_image id=”1846147387″ link=”true” target=”_blank” size=”medium” ]PostCapitalism: A Guide to Our Future[/amazon_image]  [amazon_image id=”0393246418″ link=”true” target=”_blank” size=”medium” ]Economics Rules: The Rights and Wrongs of the Dismal Science[/amazon_image]

So I’m going to offer instead another thought about by Alfred and Mary Marshall, which has been my bedtime reading for a few days. One of the striking features is that so many of what seem to be recent insights in economics are there in Marshall, in crystal clear English. For example:

“An increase of income nearly always causes pleasure; but the new enjoyments which it provides often lose quickly much of their charm. Partly this is the result of familiarity, which makes people cease to derive much pleasure from accustomed comforts and luxuries, though they suffer great pain from their loss.”

Doesn’t this sound just like modern behavioural economics?

[amazon_image id=”1932512136″ link=”true” target=”_blank” size=”medium” ]Elements of Economics of Industry[/amazon_image]

I noticed Brad DeLong coincidentally also writing about Marshall – his earlier Economics of Industry with Mary Marshall.

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Be happy! (Or else…)

It has been a busy and dyspeptic week. by William Davies has been the perfect accompanying reading material. The enthusiasm of many of my fellow economists for behavioural economics has made me increasingly uneasy. This is, after all, a profession strongly  inclined towards social engineering, and I’ve written here before about the likelihood that nudges are seen as an exciting new tool for this job. After all, they seem to work, and as even the status quo is a nudge, why wouldn’t you design better nudges to deliver better outcomes?

[amazon_image id=”1781688451″ link=”true” target=”_blank” size=”medium” ]The Happiness Industry: How the Government and Big Business Sold us Well-Being[/amazon_image]

eloquently reinforces my suspicions. It locates the fashion for “well-being” in the long tradition of making the internal world measurable and reducing questions of morality and political choices to scientific decisions. Economics, rooted in , plays a leading role in the story, as do the successive waves of management science from Taylorism on. Indeed, in management, the growing surveillance of employees’ ‘well-being’ by wearable devices is the latest version.

Davies points out there is an inconsistency at the heart of this: “Workplaces put a growing emphasis on community and psychological commitment, but against longer term trends towards atomization and insecurity. We have an economic model which mitigates against precisely the psychological attributes it depends upon.” Yet the emphasis on resilience or mindfulness puts all the onus on the individual to adjust: “one progressive route would involve changing [the] context. But another equivalent would be to focus on changing the way it is experienced.”

He is also critical of the economists’ use of the idea of revealed preference: that you can infer somebody’s inner preferences or desires from their choices, usually their choices about what to spend their money on. Shopping speaks louder than words. Perhaps wearables that can measure heart rate or sweat will replace money as the best revealed preference metric, but meanwhile what someone spends is a readily-measurable indicator, easier to count and compare than what people say about their emotions. “This granted money an exceptional psychological status, as it allowed others to peep into people’s private desires.”

Disliking money as a metric, Davies is therefore also critical, as many people have been, of using the technique of contingent valuation to put monetary values on, say, the impact of an environmental disaster. “What we witness in this sort of example is economics becoming used as a basis for broad public agreement well beyond the limits of the market place,” Davies writes. He’s in good company. and are among those who dislike the use of money as a measure of non-monetary values, such as nature, or relationhips, or civic virtue.

However, this seems to me distinct from the reductionism of the behavioural economists and psychologists. It is one answer to the question of how you resolve conflicts when there is no market: if you have to make interpersonal comparisons, how should you go about it? Or, in the words of a well known survey article, is some number better than no number? If you want to calculate compensation after an oil spill, how else could you go about it? So I am far more comfortable with these valuation techniques than I am with the happiness tendency.

On the latter, my instincts are with Davies: ” Behaviourism stretches Bentham’s dream of a scientific politics to its limit, imagining that beneath the illusion of individual freedom lie the cold mechanics of cause and effect, observable only to the expert eye.” When I teach my students behavioural economics – and they’re very interested in it – I ask them to look at this Adam Curtis blog, From Pigeon to Superman and Back Again. While not dismissing the policy sense of some nudges, beware economists who know how to make you happy and beware even more bosses demanding it of you.

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(Ain’t) Misbehaving

Despite having read plenty of the behavioural economics books, of course I had to read by Richard Thaler, one of the first people to introduce and then popularise (through in particular) the introduction of psychological empiricism into economics. Nor do I regret it. It is a very good read. Although it goes over much familiar territory, it’s very interesting to read Thaler’s account of how a highly resistant discipline became accepting and then positively enthusiastic about behavioural models. Too enthusiastic – but more on that later.

[amazon_image id=”B00SSKM714″ link=”true” target=”_blank” size=”medium” ]Misbehaving: The Making of Behavioural Economics[/amazon_image]

combines a broadly chronological account of Thaler’s career and work with a highly accessible explanation of what behavioural economics is, how it differs from the previously conventional kind, and the evidence from psychology about how people make decisions. The book starts by explaining why economists had adopted an unrealistic model of rational choice, and why it made economics so powerful: “That power derives from the fact that economics has a unified, core theory from which nearly everything follows.” Certainly early resistance to ‘behavioural’ assumptions tended to be that these derived from an ad hoc list of patterns of choice with no theory behind them, never mind that rational choice is ad hoc with respect to the facts. This seems to be hard for some economists still to accept perhaps because – as Thaler recounts – economists make choices far more often in conformity with their own models than do other groups of people. Misbehaving tells of a survey conducted among wine connoisseurs designed to explore how people regard sunk costs and opportunity costs, in which the people who gave the ‘correct’ answer were economists.

The book has lots of examples that will be useful to people teaching behavioural economics, including classroom experiments. I also very much enjoyed all the anecdotes, like the story of a vigorous debate with Richard Posner at a conference on law and economics, or a session on behavioural finance that had smoke coming out of Merton Miller’s ears. Resistance among distinguished economics professors who had built their glittering careers on rational choice models is, of course, entirely rational. Less rational, more human, was the behaviour of a group of University of Chicago economics faculty in selecting their offices in a brand new building.

Behavioural economics is now one of the most popular areas of the subject, and seminars on behavioural papers are packed. Sometimes it seems pretty much everyone I know has a new paper applying behavioural insights to their own sub-field. Perhaps this is just me being contrarian, but the new embrace by economists makes me uneasy. This is not just because of the well-known debate about paternalism (as discussed by Gilles St Paul in or Julian LeGrand and Bill New in ) It is because the sight of economists delighting in a new tool to engineer society is alarming – it’s the same old reductionism in more fashionable clothes. I happened to read this morning this essay by historian Ian Beacock on Arnold Toynbee. This quotation jumped out: “We’ve begun to treat vexing social and political dilemmas as simple design flaws, mistakes to be rectified through a technocratic combination of data science and gadgetry.”

I’m 100% in favour of empiricism. Why would you not do ‘what works’? But the behavioural rules of thumb are in danger of being seen as a new policy gadget.

[amazon_image id=”0691128170″ link=”true” target=”_blank” size=”medium” ]The Tyranny of Utility: Behavioral Social Science and the Rise of Paternalism[/amazon_image]   [amazon_image id=”0691164371″ link=”true” target=”_blank” size=”medium” ]Government Paternalism: Nanny State or Helpful Friend?[/amazon_image]

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Growth, happiness and misbehaving

I’m enjoying reading Richard Thaler’s  At about the half way stage, there hasn’t been anything startlingly new in terms of the economic content, as the book is addressing general readers rather than economists who have already read widely on the subject. It is very well written and also interesting to hear from Thaler what it felt like to be one of the pioneers in this field.

[amazon_image id=”B00SSKM714″ link=”true” target=”_blank” size=”medium” ]Misbehaving: The Making of Behavioural Economics[/amazon_image]

There are also some very interesting new (to me) insights. For instance, I’d never really thought before about the importance of changes from the reference point in prospect theory. Thaler writes: “Kahneman and Tversky recognized that we had to change our focus from levels of wealth to changes in wealth. This may sound like a subtle tweak, but switching the focus to changes as opposed to levels is a radical move….. Changes are the way humans experience life.”

This is the consequence – obvious when you think about it – of the hedonic treadmill, of acclimatising to a situation. Over in the well-being literature, this is often taken as helping explain the Easterlin paradox, the implication being that “we”/policy should help push people off the hedonic treadmill above high-enough income levels, by demoting or even somehow halting growth. But it seems to me to imply the contrary, that it makes growth very important for well-being. Just as some of the empirical work indicates.

I’ll review the book when I’ve finished – which will be at the weekend as I need something smaller to pack in my bag for the train tomorrow.

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Sympathy, empathy and scarce attention

Last night I attended a fascinating lecture by Sendil Mullainathan on his book with Eldar Shafir, . I haven’t read it yet but will certainly do so now.

[amazon_image id=”0141049197″ link=”true” target=”_blank” size=”medium” ]Scarcity: The True Cost of Not Having Enough[/amazon_image]

The book has been widely reviewed so the main argument is probably well known: people who do not have enough money have their attention focused on immediate problems, to the detriment of thinking about the consequences of short-term actions. The future in general is outside the tunnel of what they have the capacity to pay attention to. “Cognitive bandwidth is a fixed resource.” A lot gets used up by attending to urgent, day-to-day financial problems and needs – about which, slightly paradoxically, the people in this situation are ultra-rational, and very focused on the most cost-efficient decision.

The scale of the effect of this attentional tunneling on the quality of other decisions is large – almost as big as not having slept at all at night. All the time. And the decisions adversely affected cover all aspects of life, not just financial choices like whether or not to take out that pay day loan: how to parent, whether to keep up a course of medicine, and so on.

There are other kinds of scarcity that create the same kind of tunnel vision – including time scarcity. Prof Mullainathan drew this analogy, saying he’d tried it on hedge fund managers to see if it helped them understand the psychology of poverty. Someone with no money opting for a payday loan is like someone with no time not having time to do a piece of paperwork and ending up spending more time sorting out the resulting hassle. However, he added: “Different forms of scarcity have different optionality. Poverty is relentless. I can’t decide to change my poverty-life balance.”

The next question of course is what conclusions to draw from the insight about scarcity (of money) gobbling up people’s cognitive bandwidth. One conclusion is that expecting people on low incomes to fill out long forms to get benefits – or do anything – is a regressive attentional tax. Just as the cockpit of a plane is designed and engineered to be as fault-tolerant as possible, we should do the same with any engagement between people and government (or businesses, or school…..). Another that occurs to me is whether it’s possible to design some simple financial planning aids or reminders.

Interestingly, Prof Mullainathan said: “People who care about poverty tend to feel sympathy. But sympathy is a distancing emotion. We need to feel empathy.” It reminded me of Julia Unwin’s excellent book , which is exactly about the emotional reaction we have to poverty and why that actually makes it harder for well-meaning policy people to do anything about it.

[amazon_image id=”B00I124BLS” link=”true” target=”_blank” size=”medium” ]Why Fight Poverty? (Perspectives)[/amazon_image]

 

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