Sunday, December 1, 2013

What Behavioral Economics Is Not

The first misconception, that “behavioral economics is about controlling behavior:”:

Some people are worried that behavioral economics will be used, whether by corporations or the government, to control behavior. …What distinguishes the behavioral toolset, however, is that so many of the tools are about helping people to avoid making a decision that they themselves would consider a mistake. Elderly Americans who enroll in Medicaid Part D private drug plans are asked to choose from over 40 options. An intervention that reduced this overload – sending enrollees a letter with information about three alternative plans that would be cheaper for them — nearly doubled the proportion of enrollees who decided to switch plans… and saved $150 per year on average for each person who switched.

The point?

…the most interesting and innovative tools are those that make it easier for people to do what they already want to do — to realize their own good intentions.

The second common misconception, that “behavioral economics is liberal (or conservative)”:

…behavioral economics is being picked up and used everywhere. When liberals are in power, it’s used by liberals. When conservatives are in power, it’s used by conservatives. In fact, the political party that has most embraced behavioral economics is UK Prime Minister David Cameron’s Conservative Party…

Furthermore, while Cass Sunstein may have served as the “Nudger in Chief” during the Obama administration, the only US presidential candidate to have published an academic paper on behavioral economics is a Republican, the former governor of Arkansas, Mike Huckabee.

But there’s a reason why BE’s acceptance is politically wide-ranging:

…behavioral economics appeals to pragmatists and realists because it simply provides a set of tools. It does not rely on heavy-handed state solutions, or on the conceit that people are best left to their own devices. …Savings defaults can raise retirement savings without increasing payroll taxes. Social norm messages can reduce energy use without imposing a carbon tax. “Behaviorally” designed stimulus packages can be as effective for less money.


The final misconception the essay discusses, that “behavioral economics is about irrationality.”:

Rationality has a very specific meaning within economics; it refers to a set of mathematical assumptions economists use to describe our preferences, and how they lead to actions. …When economists use the term “irrational” they mean something very different than how we use it in everyday conversation. …Economic “irrationality” has more in common with irrational numbers (such as pi or √2) than it does with Tom Cruise, Charlie Sheen, or Miley Cyrus.


On the other hand, behavioral economics is built upon psychology, not mathematics. We know that our preferences do not necessarily determine our actions. Psychologists study the brain as it is, rather than trying to assume away the messy details.


When people label human behavior as “irrational,” they are “assum[ing] away the messy details.” Behavioral economics avoids this mistake because of its recognition that context heavily affects the way we make decisions and take action. And the traditional model of decision-making cannot account for the infinite complexity of context.


We believe that people are usually very clever. But the human brain is not a perfect problem solver in all situations. So when someone makes a mistake, it’s important to understand the context that led that mistake to happen. From this, patterns begin to appear. People are not consistently lazy, or stupid, or hot-tempered. But in specific situations they may appear to be so. And though these errors are systematic, the successes are as well. So behavioral economists look for examples of both.


- More Here

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