Wednesday, May 05, 2010

Common Sense Economics or just Economics?

I have been presenting to policy-makers for the last few years on ideas from behavioural economics. My main purpose in this has been to disseminate what I believe to be the most influential ideas from the global literature mainly to people in Ireland and to some extent continental Europe. It is frustrating when one sees such a limited number of ideas still exercising such a sway on the way we design institutions and implement policy in this and other countries. Regardless of current debates about the Irish Universities, I still believe fully in their remit to constantly pour out the best knowledge available to its academics and for their staff to be part of the process whereby such ideas change the world.

One limit in talking about our work is the use of the phrase "behavioural economics". For anyone with any sort of leaning in psychology, it triggers images of Watsonian behaviourism and I have frequently been hit with "but hasn't behaviourism failed in psychology and philosophy?". The reply to this is, of course, that behavioural economics has almost nothing in common with behaviourism as the old psychologists viewed it and is far more grounded in the cognitive revolutions in psychology in the 1960s and 1970s. Those of you from psychology backgrounds should think of behavioural economics as social psychology, neuropsychology and cognitive psychology applied to economic questions and the design of economic policy and institutions. Certainly linking it with the behaviourist paradigm makes sense in only a very specific sense.

A further complaint is the view that attempting to influence behaviour is reminiscent of the tactics of totalitarian regimes. I have started to call this the "Rasputin" critique in recent talks, with some of the comments reminding me of the unease some of the Russian nobility felt at a mystic having influence at court. While Thaler and Sunstein's Nudge has completely launched the discussion of behavioural economics on to the stage even in Ireland, it has also heightened the fears that behaviourally-inspired policies come from a place that neighbours more sinister forms of state control. I get this critique regularly, mostly from people who have read one article in the newspaper and have made their mind up, but also from people who have studied the topic.

I am penning longer versions of these ideas but I want to begin with the idea that the main contribution of behavioural economics to policy debates is a restoration of basic common sense in the assumptions we make about human behaviour. By allowing flexibility in the extent to which people are assumed to be fully rational, fully selfish, future orientated, adaptable to events, information processing and so on we are given a great opportunity to look at institutions that have failed miserably and to think about how to redesign them. Wrapping this in a banner of "behavioural intervention" or "behavioural change" is very limiting and will not be accepted in societies like Ireland where the very mention of behaviour from governments evokes a backlash.

If I were to summarise very briefly why this literature should now be the main influence on Irish economic policy, it is simply that it restores our ability to draw from basic things we know about how humans think and act to help us overcome the main problems that face us in the next 50 years. I am tempted to simply call this "common sense economics" and to take the resulting flak. Another temptation that I have mostly resisted is simply to call this Economics and to draw a temporal line between what is now Economics and what was considered Economics before this massive change took place.

I think this blog is not a bad place to start a debate about how we should bring ideas from behavioural economics into the policy arena and to think about whether packaging them as "behavioural interventions" is too limiting philosophically and damaging from the point of view of communication.


Gerard O'Neill said...

I think part of the 'policy resistance' to behavioural economics is, dare I say, much the same as resistance to most policy innovations in the past.

Remember 'evidence-based policy formation'? The phrase was bandied about often enough, but seriously, a review of policy development (economic and other) in Ireland over the past decade would reveal little use of 'evidence'. Decentralisation anyone?

At the end of the day we don't have policy makers, we have politicians and public servants who advise them. The reality of policy making is that the primary motivation of the makers is to signal their continuing capacity for remaining in their job, regardless of whether they are effective or not at their job.

Sorry if that sounds a bit cynical Liam, but if you want to seriously assess the potential for behavioural economics based policy making in Ireland then you're going to have to apply some behavioural insights to the policy makers it seems! Perhaps we need to reframe the role of behavioural economics not so much as 'evidence-based policy making' but as 'ends-based policy making'.

But on a more positive note: businesses don't have anything like the same baggage about adopting new ways. IAPI have a forthcoming seminar with the UK's Rory Sutherland on behavioural economics and advertisiing which sold out in a matter of days.

There's hope yet!

Anonymous said...

How about "human economics" instead of this "rational economics" paradigm.
I always thought rational expectations & the rest of it was hilarious coming from physics, where you are quite explicit about uncertainties in our model and now we are modelling systems with humans and we just assume all the problems away.
Thank you for a very interesting blog.

@Gerard: And do not forget that each of the politicians and policy makers have their own agenda, whihc may or may not pull in the same direction.

Marie said...


I think there are 3 questions in this. The first question is related to the content and boundaries of the field, the second relating to its name/brand, the third relating to how to spread its use. A marketer could have a field day with this.. You’ve got all the classic questions of defining the product, branding it, placing and promoting it. The only marketing question you’ve left out is how to price it (how much are BEs paid relative to other Es?!)

In terms of what to call it or brand it, I certainly find “behavioural economics” to be unwieldy, unclear and perhaps not a good signal of what it is supposed to convey. Although “Economics” would be cleaner, perhaps carry more clout with certain audiences, it would also evoke thoughts and notions of mainstream economics and certainly mis-convey what BE is about (unless BEs are successful enough to redefine what E is about.. a process that will take some time and which will continue to meet with resistance). “Common sense Economics” obviously carries a sub-text that the rest of economics is “Not Common sense Economics”. This risks alienating audiences sympathetic to economics, whilst not necessarily conveying what BE is about either. It loses points on unwieldiness too. Calling it “Behaviouralism” also has its limitations in terms of conveying the depth and breath and perhaps the underlying philosophy of this fledgling discipline, although it is, at least short.

Perhaps before getting too stuck on the name, we need to stop to think what BE is actually about (and more importantly where it is heading), and what name it can have that accurately reflects this (although this is not strictly necessary.. there is nothing about the word “tree” that conveys treeness other than the fact that we believe this to be so through usage. Perhaps we can just coin a totally new word and use it for BE..I was actually going to suggest “humanomics” or “humanology” but googled this and, guess what? there are already disciplines with this name).

You say behavioural economics is like "social psychology, neuropsychology and cognitive psychology applied to economic questions and the design of economic policy and institutions". But we know that the “economic question” is itself a very broad one, and spreads into domains previously considered as remits of other social sciences. So we have social psychology applied to socio economic questions. So why not just call it “social science”? It leaves the elbow room that BE needs to grow, it is respectable "science", it is understandeable and it is already familiar.

In terms of how to exert influence, I think this has less to do with what the discipline is called, or what it contains within its fold and more to do with how many of the people who study it wind up in policy making positions. In Malta’s case, politics is vastly dominated by architects and lawyers which goes a long way to explain why much of our interventions are legal or infrastructural, with little strategic use of incentives or other policy making tools.


Liam Delaney said...

Humanomics and Human Economics are nice tries but they sound vaguely occult and I wouldn't fancy trying to fly under that flag. The challenge from my point of view is to walk into a room full of people who think that economics is solely about forecasting inflation and exchange rates and convince them that it is now far broader and far more interdisciplinary. Calling it social science is not going to work because many of them are programmed to think of Economics as being the discipline that deals with economic policy questions.

I don't agree with Gerard's cynicism. In Ireland, we have such enormous problems in the future financing of health and pensions and a range of other issues that sovereign survival will require smarter policy. As Keynes pointed out, the state needs to understand the psychology of markets to continue to exist. We have had a soft budget constraint in Ireland for the last 20 years and now we have to develop tougher and more nuanced policies.

Though I do agree with Gerard that private groups offer a quicker way of hammering some of these ideas into the real world. I will be talking about this at BizCamp in Limerick on Saturday.