George Loewenstein and Peter Ubel have an interesting op-ed in this morning’s New York Times arguing that insights from behavioral economics have been abused by policy makers in order to avoid hard choices. The policy implications from many behavioral economics studies are often relatively pain-free from a political perspective. For example, they suggest that simply giving consumers a bit more information can encourage them to eat healthier, save energy, and make better health care choices. The problem, Loewenstein and Ubel assert, is that these solutions often have only tiny effects compared to the size of the problem they seek to address. Ultimately, changing relative prices is much more likely to meaningfully impact behavior deemed socially undesirable. So, making healthier foods cheaper is much more important than labeling unhealthy food. Meaningful reductions in CO2 emissions require increasing the cost of traditional sources of energy. Giving people more information about their energy consumption helps a little at the margin but should not be thought of as a solution to the problem. The op-ed has many more examples.
Loewenstein and Ubel’s op-ed is mostly aimed at warning people that behavioral solutions are no panacea. I am only a modest consumer of this research so I cannot evaluate all their claims. Yet, it strikes me that if they are right, their argument is really quite damning for the behavioral economics revolution. Essentially, they assert that traditional economic analysis has ultimately much more relevance for the analysis of major social problems and for finding solutions to them. Behavioral economics can complement this but cannot be a viable alternative. Within political science and other social sciences the insights of behavioral economics are sometimes interpreted as undermining the very foundations of classical economic analysis and warranting an entirely different approach to social problems. At the very least, the op-ed is a useful reminder that careful scrutiny of effect sizes matters greatly.
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Great point. As someone who works with policymakers, though, let me say that getting policymakers to understand something as technical as “effect sizes” is no easy task. (I don’t know if this is addressed in the op-ed.)
Erik – I don’t think you can draw that conclusion from their article.
They focus on one particular set of policy recommendations coming out of behavioral economics that the “Nudges” book has made very prominent.
There are many more findings (one relevant example would e.g. be investor overconfidence).
Or take prospect theory, one of the very early findings of behavioral economics – Kurt Weyland’s work suggests that it has a major impact in very important policy decisions.
Finally, even some of the nudge stuff is a lot more dramatic – opt-in vs opt-out of insurance/pension etc. programs has dramatic effects – you get several times the amount of people into a program is you use opt-out.
So I think the article is great – warning against nudges as panaceas is a good idea – but I don’t think it’s time to pour out the behavioral bathwater quite yet.
Sebastian: I agree with you and hopefully my post was more careful than to conclude that we should not do behavioral work (not sure, I wrote it at 6am this morning). The op-ed very explicitly takes the position that behavioral economics can complement classical price analysis but is not by itself a viable alternative to it. My sense is that political scientists often see the behavioral revolution in economics as evidence that classical economic analysis is fundamentally misguided and should be replaced by analysis based on behavioral insights.
You and the op-ed authors are defining behavioral economics down. It is not merely “nudge-like” policy prescriptions. The discipline is what the title implies – a focus on how people behave in the economic environement. How do they deal when faced with less than perfect information, limits on time and cognitive ability, or discrepancies in economic power? I.e. they are seeking to determine whether the neoclassical assumption of perfect information and rational behavior holds, or is approximated.
In many instances people behave in ways that approximate the assumption of rational self interest. In many circumstances they don’t. I don’t think there is a behavioral economist out there who would assert that people don’t respond to price incentives. Behavioral economists would therefore see changing the relative prices of healthy and unhealthy foods as a relevant policy answer to obesity, and carbon pricing as a relevant solution to reducing energy use.
Behavioral economists, because they have what may be a more realistic picture of peoples’ cognitive limitations and the way they make decisions under uncertainty or information limits, may identify policies that would not occur to a “traditional” economist. Most of what “traditional” economists have to offer are the brute force of changing relative prices through taxation, cap and trade, etc. I don’t think behavioral economics would say these policies are never appropriate or that they are ineffective. However, their observation that people often exhibit behavior that is inconsistent with what our conception of a fully informed rationally self interested actor would do, may lead to policy prescriptions that would not occur to a traditional economist. These prescriptions may not have quite the impact of a change in relative prices, but in some cases they might, and in any case the point is to develop a more fully informed model of human behavior in economic situations, not to come up with “painless” policy prescriptions of limited effectiveness.
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