Thursday, July 15, 2010

Is behavioural economics oversold?

George Loewenstein and Peter Ubel argue that "Behavioral economics should complement, not substitute for, more substantive economic interventions. If traditional economics suggests that we should have a larger price difference between sugar-free and sugared drinks, behavioral economics could suggest whether consumers would respond better to a subsidy on unsweetened drinks or a tax on sugary drinks.
But that’s the most it can do. For all of its insights, behavioral economics alone is not a viable alternative to the kinds of far-reaching policies we need to tackle our nation’s challenges."


Peter Carney said...

I would have to agree, but only in the case of interventions and policy design, as they suggest.

Behavioural economics is, as i see it, an alternate paradigm to view, understand, and predict economic phenomena; moreover it's theoretical foundation rests strongly on empirical contradictions of standard neo-classical theory. In that sense, behavioural economics really is a substitute and thus it is possible to imagine that it could, in time, lead to interventions that substitute 'more substantive economic interventions'.

Kevin Denny said...

Well if its either/or then I think I will stick with neoclassical for the moment. But I don't think it is. So if some irrational behaviour causes you to junk neoclassical economics, what about some rational behaviour?
For example, if we want to measure welfare changes from say a tax reform how do you do it without utility functions, consumer surplus, substitution effects and all that jazz?

Liam Delaney said...

I cant believe they are making a distinction between behavioural economics and substantive interventions. BE is about the foundations of substantive policy not about particular policies. They are right to caution that various interest groups will distort the academic literature to argue for softer options but this is not the way to go about this. I think the problem is that the phrase behavioural economics has come to mean too many things. For me it is mostly a term of protest against the nonsense that arises when neoclassical assumptions are taken too literally. It is like a rallying flag for people who actually want to test how people behave in economic contexts. It is not a synonym for any particular type of intervention.