Monday, April 27, 2009

In praise of behavioral economics

I suppose you know you have made it when someone summarizes your subfield, with partial if not complete understanding, in Time magazine.

It is true that the author of the piece, one Michael Grunwald, does not actually understand how economists define and use the word "rationality", which confuses things for an economist reader. He uses "rational" as a synonym for "normative" which it decidedly is not. Contrary to the text, one can be "rational" in the economic sense and have unprotected sex and cupcakes - even both at the same time. Discount rates matter and so does the utility function in determining what is rational.

Putting that, and a too-big-for-your-diet helping of Obama Messiah Disorder (can behavioral economics cure this?), to the side, there is some interesting stuff here about the use of the lessons from behavioral economics in the Obama campaign and in various policy proposals pushed by Obama (and by others, often well before Obama came on the scene). Policy can be improved by looking at the evidence from the behavoral economics literature - just as there are still quite a long list of policy areas that would benefit from looking at the evidence from the plain-old-economics literature.

Of course, some of the policy ideas discussed in the article, like simplifying student aid forms as proposed by my colleague Sue Dynarski or comparative effectiveness research for medical interventions, have nothing to do with behavioral economics (nor with market failure). The government designed its student aid process all by its happy self in a way that both makes the process much harder than it needs to be and insures that it will have little effect on student choices about which college to attend. The lack of comparative effectiveness research for drugs is again government failure (and academic failure, to an extent) in the design of the clinical trials system that underlies drug approval and in the conduct of medical research more generally. [As I often ask, what exactly were you folks doing before "evidence based medicine"?]

So, three cheers for looking at good evidence, whatever the label it carries, and one cheer for Time magazine for their C+ summary of behavioral economics and its relevance for political campaigns and policymaking. I look forward, with only minor trepidation, to Time's piece on downward sloping demand curves.

Hat tip: Dave DeLauter