Can Behavioral Economics Save Us?

NPR had a fascinating segment today on All Things Considered concerning the use of psychology to save your from yourself (generally) and applying this approach to economics (specifically) in a manner that makes a lot of sense.

It should come as no surprise that we humans don't do a very good job at analysis and decision making due to all sorts of biases and brain farts. Even when faced with evidence that our decisions are terrible, we'll continue to support our own conclusions.

For example, we tend to seek out data that supports our views while avoiding information that challenges them. That's confirmation bias and it clouds our ability to think clearly and rationally. Think of it this way - how many people watch both FOX News and MSNBC?

Anyway, a growing number of people working in the Obama administration are believers of psychological research as a basis for economic thought, or as NPR points out:

"...the human animal is hard-wired to make errors when it comes to decision-making, and therefore people need a little "nudge" to make decisions that are in their own best interests."

The NPR story delves into the genesis of behavioral economics and it's no surprise that economists are clucking while dismissing the whole thing as mumbo-jumbo. Conservatives use the topic to point out yet another way for government to insert itself into personal choice and liberty.

I think I'm on the side of behavioral economics on this one, folks. The examples make sense to me, and there have been numerous failings of previously-sacred economic models of late.

Even if fancy computers parse the data and crunch the numbers, people design the codes and algorithms that make up the models. Human psychology has to play a role.

Some of the concepts put forth in the NPR story are familiar to me, as I'm in the middle of reading The Science of Fear, by Daniel Gardner. "Anchoring bias" is one of them:

For instance, Kahneman and Tversky identified "anchoring bias." It turns out that whenever you are exposed to a number, you are influenced by that number whether you intend to be influenced or not.

Credit card companies count on this bias when they suggest a very low minimum payment on your bill. We tend to make a decision on how much to pay based on using that very figure as a point of reference.

Humans are nothing if not erratic and irrational, and we seem to be able to accept that in nearly every facet of our lives. Why not economics?

For those who worry that "nudges" are another word for expansion of government reach, consider this passage:

But Thaler argues that government policymakers don't need to be hyper-rational to help people make better choices.

He offers this example: Any American who goes to London realizes that they are endangering their lives every time they try to cross the street, because the traffic comes from the wrong direction.

Our instinct is to look left, but if you look left, you'll get run over by a double-decker bus. To help us, Thaler says, someone in the British government decided to write on the sidewalks of busy intersections filled with American tourists the words "look right."

"British bureaucrats are no smarter than American bureaucrats," says Thaler, "but they know that tourists tend to look the wrong way and could use a helpful nudge to avoid getting hit by a truck."

As I look around at our current economic situation and see the millions that have been flattened by a collapse that no economist predicted, I can't help but think that anything that keeps us from being hit by the next truck is truly welcome.

Unless economists have a better idea?

Using Psychology to Save You from Yourself , via NPR