A nice interview of one of my fav econs – Robert Shiller.
He discusses behavioral economics, its history and way forward. He even discusses Einstein..He also points to how med school grads are taking interest in econ seminars because of linkages with neuroscience..
Nigel Warburton: The topic we are going to focus on is behavioural economics. Now we know roughly what economics is, but what’s behavioural economics?
Robert Shiller: Well the word ‘behavioural’ refers to the introduction of other social sciences into economics: psychology, sociology, and political science. It’s a revolution in economics that has taken place over the past twenty years or so. I think it’s bringing economics into a broader appreciation of reality. Economics was actually more behavioural fifty or a hundred years ago. At Yale University where I work, 1927 was the year where the department of economics, sociology and government was split into three separate departments and they moved us all apart.
Nigel Warburton: Why would it matter if they just split the departments up, I mean there’s an argument that specialisation actually allows people to progress further in their field – rather then knowing a little bit about everything.
Robert Shiller: Absolutely. There are both advantages and disadvantages of this structure. The advantage is that we develop mathematical economics and mathematical finance to a very advanced level – and it’s useful: we have option pricing theory that is very subtle and allows complex calculations that have some relevance to understanding these markets. But it loses perspective on why we have these options anyway. It offers a justification typically that involves rational behaviour. You can get into the swim of that, thinking ‘I want to know why smart people use options’ And it’s instructive to go through the exercise of thinking ‘is it really ever right to buy these investment products?’ But that doesn’t mean that you’re answering the question why people really do buy options and why this market exists and why other markets that sound equally plausible don’t exist.
Einstein and the Physics envy:
Nigel Warburton: Is that because economists tend to see themselves as ‘hard-scientists’, as appose to the wishy-washy soft end of social science.
Robert Shiller: I think that the economics profession suffers from physics-envy. I really do. We all wish we could be Einstein. It’s too strong a model, we can’t all develop the theory of relativity. The world of people isn’t like that. When you look at what happens for example in a financial crisis, you’ve got to get immersed in a lot of detail. It doesn’t become understandable by abstract economic reasoning. This means you have to look at an impression of what’s driving people, what’s on their minds, what they don’t know, what the lawyers did with the contracts, what the people are assuming the government might do if such and such happens. It involves a lot of real world thinking which doesn’t fit with the Einstein model.
Nigel Warburton: If I take your example of Einstein, what’s so amazing about Einstein was that he made a bold hypothesis that was then to some extent corroborated later. Couldn’t economists do that? I mean can’t you have a mathematically generated hypothesis and then it’s either proved to be correct or not?
Robert Shiller That’s an interesting question and I’ve never been asked that before. I know Einstein wrote his special theory in 1905 and it wasn’t until 1919 when they did an experiment involving a solar eclipse that Einstein was vindicated. So is there an example like that in economics? What springs to my mind is usually the opposite. Economists will see empirical regularities in the data and become famous for having named some empirical regularity and then shortly after that it stops happening. And so that’s the reverse!
Why med school grads are coming to econ seminars?
We are learning amazing things about human behaviour, we could also add neuroscience. It seems to me that the profession advances by bringing in insights from other professions. And the place where 20 years ago I would least have expected it is the medical school. But you know people from the medical school are now coming into economic seminars because they go back to their lab and they can do an MRI or single-neuron study and see what’s happening inside the brain. It used to be that we had no insight, we believed in what Samuelson called ‘revealed preference’. We will look at people’s functions of their mind by seeing what they do in their economic actions and there’s no other way. But now we can look inside the brain and see something. One thing about behavioural economics incorporating neuro-economics is that it’s going to be a very productive field in the next twenty years and it’s going to change our thinking about the economy.
Econs should draw an example from traffic signal designer:
Well, what it should do, economists’ analysis should inform better public policy and reduce the frequency of crashes. We don’t want to have these crashes in the first place. And so they will be unsung heroes who saw something coming and averted it. It’s just like the guy who designed the traffic lights and he prevents accidents. You don’t go to this person thankfully saying ‘you prevented my accident’, you don’t even know that the person prevented it. So that’s the kind of world where economists will fade into the background, just like the street planners in the city, and yet be doing good things.