Thursday, October 10, 2013

The Undercover Economist Strikes Back

The Behavioural Insights Team has a new blog post about Tim Harford's new book The Undercover Economist Strikes Back.

"Tim’s previous books have tended to cover microeconomics, i.e. the behaviour of individuals or firms. But Tim’s new book looks at macroeconomics, which is the study of entire economies or multiple economies. Tim argues that behavioural science has a place in understanding economics, even on this grand scale: classical models, which assume perfect rationality on the part of ‘economic agents’ (i.e. people, companies and governments) have been found wanting during the economic crisis; newer models, which account for agents being short-sighted, overconfident, or focusing on the salient, may do a better job at predicting future crises and dealing with problems that emerge. 

For example, unemployment is often viewed as a macroeconomic problem. However, Tim cites the Behavioural Insights Team’s trials with Job Centre Plus, which make use of microeconomic, behavioural techniques to help job seekers find work, as an example of the use of behavioural science in macroeconomic policy. In fact, we can see the hand of behavioural biases at work in macroeconomic concepts such as sticky prices (endowment effects), the paradox of thrift (uncertainty aversion), and in the failure of Ricardian equivalence (hyperbolic discounting and procrastination). What are the other examples? Let us know your thoughts".

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