I'm a big fan of behavioral economics. In the span of a few decades, it has managed to translate prospect theory - the groundbreaking work of Kahneman and Tvserky - into an important theoretical supplement to classical economics. The field is also a perfect example of interdisciplinary thinking, as ideas first developed by psychologists have come to inform all sorts of microeconomic models. And yet, like all trendy new fields, I'm afraid behavioral economics has suffered a bit from the excessive hype. In my latest WSJ column, I look at some of the disappointing real world tests of its ideas:
For the last few hundred years, a simple assumption has dominated economic thinking about human nature: We are rational creatures. When faced with alternatives, we carefully maximize our utility, just like those hypothetical agents in the Econ 101 textbooks.
Unfortunately, the latest research on the mind demonstrates that a whirligig of emotions, instincts and biases, many of which operate outside conscious awareness, shapes our behavior.
In recent years, politicians have begun proposing policies directly inspired by this conception of human nature. Many of these ideas have come from the rapidly growing field of behavioral economics, which uses the insights of psychology and neuroscience to construct more realistic models of how we decide. This research often focuses on irrational choices, such as taking out subprime mortgages and ordering double bacon cheeseburgers.
Behavioral economists hope to construct "nudges" that push us in a more responsible direction. They do this primarily by tweaking our decision-making environment, altering the way we perceive our options. For instance, studies show that placing fruit at eye level in a school cafeteria can dramatically increase sales. Instead of gorging on cookies, the kids are nudged into eating apples.
The influence of behavioral economics is already visible in the halls of power. Cass Sunstein, a Harvard legal scholar and co-author of "Nudge," a best-selling survey of the field, is serving in Barack Obama's White House. British Prime Minister David Cameron, meanwhile, has established a "nudge unit" in his Cabinet office and regularly consults leading academics in the field.
For policy makers, the allure is obvious. Behavioral economics promises to help solve difficult societal problems, from energy consumption to the obesity epidemic, for relatively limited costs, without additional taxes or burdensome regulations.
It's always encouraging to see politicians embrace the ideas of science, to seek practical applications for the latest research. We should want our laws and regulations to be grounded in an accurate vision of how we make decisions.
And yet the initial results of many of these policies have been humbling. Consider the new regulations in New York City requiring restaurants to list the calorie content of all menu items. (Similar regulations were part of the 2010 federal health-care reform legislation.) Although proponents of the law hoped that the extra information would lead consumers to shy away from Caramel Macchiatos and McGriddle sandwiches—officials estimated that, over a five-year period, the law would keep 150,000 New Yorkers from becoming obese—that hasn't happened. Instead, initial analyses by researchers at New York University and Yale have found that, since the law was enacted, the average restaurant-goer has actually been purchasing slightly more calories.
Or take a recent study in Sacramento, Calif., that tried to curb household electricity consumption. (Prime Minister Cameron has repeatedly cited this research.) While traditional energy bills inform customers only about their own consumption, these bills directly compared them with their neighbors. The hope was that homeowners would compete to use less energy. But usage fell only about 1.5%. That won't do much for energy independence or to fight climate change.
There are two problems with these reforms inspired by behavioral economics. The first is that the nudges of policy makers must compete against the nudges of the marketplace. A fast-food meal might contain a frightening number of calories, but it's also delicious. (Fat and sugar taste good.) In these cases, the nudge that appeals to our irresponsible side often wins.
The second problem is that such nudges are ill-equipped to solve thorny societal problems. Take energy consumption. As the behavioral economists George Loewenstein and Peter Ubel have pointed out, the most effective way to reduce energy consumption is to increase its cost through higher taxes on carbon. That solution, of course, isn't popular or trendy, which is why most politicians aren't interested. Nevertheless, such an old-fashioned fix, rooted in the assumptions of classical economics, would be far more effective than a redesigned electricity bill. Sometimes, we don't need a nudge. We need a shove.
It's never easy to apply the latest theory of human nature to actual human beings. Just because we have a better understanding of how the mind works doesn't mean we can always get it to work the way we want.
