What behavioral economics is and what it is not..

Matthew Darling, Saugato Datta, and Sendhil Mullainathan write a short note on what behavioral economics stands for.

There are more and more articles, books and websites explaining behavioral economics. But we’ve noticed something in our conversations. As people learn more about behavioral economics, misconceptions creep in. There are three misperceptions we see quite frequently: 
 “Behavioral economics is about controlling behavior…”
 “Behavioral economics is liberal (or conservative)…”
 “Behavioral economics is about ‘irrationality’…”
Just as a sculptor must chip away every part of a rock that is not an elephant, it may be useful to define behavioral economics by what it is not.

Beh eco is not about these three claims:

Behavioral Economics Is Not About Controlling Behavior: …What distinguishes the behavioral toolset, however, is that so many of the tools are about helping people to make the choices that they themselves want to make. You can see this most  clearly in how many people apply behavioral solutions to their own problems. We set up automatic reminders on our phones. We make public commitments with our peers(sometimes using resources like StickK or gym-pact)1. We give ourselves deadlines and punish ourselves when we fail to meet them. A good behavioral intervention helps people avoid making a decision that they themselves would consider a mistake.

Behavioral Economics Is Not Liberal (Or Conservative): Applied behavioral economics came of age after Richard Thaler and Cass Sunstein published  “Nudge” in 2008. Not coincidentally, the incoming Obama administration started to use it, both in policy and in campaigning 3,4. Therefore, many Americans have concluded that behavioral economics is a tool of liberal administrations.  But 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. 

‘If anything, 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. Instead, it charts a middle path, recognizing that a better understanding of human decision making can help solve a variety of problems, including both market and state failures. That’s why it’s being picked up and used by a wide range of governments as well as private companies.8 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. Behavioral economics is not ideological; it works.

Behavioral Economics Is Not About “Irrationality” : When the word irrational is used in everyday language, it is almost always meant as an insult.Perhaps we use it to describe a poor decision by our boss, or to win an argument with our spouse. In this vein, it is used to shut down conversation, not to expand it. So why would we use such a word to describe humans in general?

When economists use the term “irrational” they mean something very different than how we use it in everyday conversation. It’s the mathematical inverse of the “rational actor” model— more closely linked with terms like convexity and transitivity than with impulsivity or emotionality. Economic “irrationality” has more in common with irrational numbers (those that cannot be represented as fractions, 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.

So whar is it? It basically picks things from both psychology and economics:

Behavioral economics differs from standard economics in that it uses a more realistic (and more complicated) model for people; it differs from psychology in that it maintains the focus on institutions and the contexts in which decisions are made. Behavioral economists  study how the context of decisions interacts with our expanding understanding of human psychology. By combining the insights from these two very different perspectives, behavioral economists have been able to reveal new depths in ourselves.

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2 Responses to “What behavioral economics is and what it is not..”

  1. [Reblog] Eight Bright New Ideas From Behavioral Economists That Could Help You Get Healthy « Health and Medical News and Resources Says:

    […] What behavioral economics is and what it is not.. (mostlyeconomics.wordpress.com) […]

  2. prabhatpingreja Says:

    Cognitive scientists love to call themselves behavioral economists.

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