Hip to BE square

The Productivity Commission has just posted on its website the proceedings of a 2007 roundtable on behavioural economics. The most provocative piece is by QUT’s Paul Frijters (who mistakenly gets a UQ designation), discussing Eldar Shafir’s opening keynote. Frijters’ discussion (which starts on p35 of the PDF) is a neat summary of the problems involved in applying behavioural economic research to policy. A few snippets:

After presenting his list of anomalies and giving us nice anecdotal research to make it indeed entirely plausible that these all exist and are important for real-life decisions by people of flesh and blood, Shafir attempts to draw some policy conclusions. Shafir’s policy conclusions are a little weak, it has to be said. His paper is full of the usual ‘we should take into account’ and ‘we may also need to reconsider’ and ‘policy should be carefully crafted’, but he essentially leaves it up to the reader to work out what any item on the list means for policy advisers. Indeed, he gives no real suggestions for new policies, but rather mentions policies that were enacted in an era preceding ‘anomaly economics’, presumably as evidence that ‘anomaly economics’ has a point. …

Implicit in Shafir’s piece is that it is actually possible to think through the consequences of these anomalies for policies. This requires their integration into the current economic policy toolkit of Homo Economicus, and policy directed at correcting market failures. Shafir himself does not undertake to do this, but explicitly calls for it to happen.

It is not just Shafir who can not integrate them. To my knowledge, no-one in this literature has even been remotely able to incorporate a multiple of items on The List into actual modelling or into a blurred overall vision of human choice behaviour. We still cannot do what the classical economists thought too hard to attempt.

If even the leading authors in this field cannot integrate the lessons of the anomalies into mainstream policy advice (and even his list is far shorter than the full one), it should be clear that it is going to be extraordinarily difficult to do. Indeed, I think we should simply admit that it is not going to happen: we are stuck with a fairly unorganised and large set of anomalies which we are never going to be able fully to integrate into a theory that does justice to each of them. Unless we are prepared to simplify The List into a couple of much simpler rules of thumb, it is just too hard to come up with a framework that really makes intellectual sense.

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11 Responses to Hip to BE square

  1. Paul Frijters says:

    thanks for the thumbs up, Andrew. What’s your position in all this? Are you a purist of the ilk

    “economists MUST incorporate ALL human idiosyncracies into their models and otherwise economists are FRAUDS”

    or are you a pragmatist of the ilk

    “we MUST make decisions and hence have to go with the most REASONABLE abstractions we can come up with even if it is demonstrably wrong no many counts”.

  2. Andrew Leigh says:

    Paul, in public debate, I’d very much take your position. In an academic seminar, I’d be more inclined to focus on the idiosyncracies. I wrote a little about this last year.

  3. Invig says:

    “Indeed, I think we should simply admit that it is not going to happen: we are stuck with a fairly unorganised and large set of anomalies which we are never going to be able fully to integrate into a theory that does justice to each of them”

    You reckon?

    Thing is, even if I was to try to publish my work on this, it would be rejected since it only disenfranchises those currently seen as authorities on the subject, and who hold the reins of power over which voices are heard, and which are not.

    Ironically, that is an aspect of human behaviour that itself should be (and I do) included in any such ‘universal model of human society’ (or whatever you want to call it).

    Anyways, whomever of Andrews’ fine readers that wish to read my thesis can email me.

    *holds breath*

  4. Sinclair Davidson says:

    Invig – why? There are journals that cover everything and all fields within economics – even behavioural stuff.

  5. derrida derider says:

    True, a lot of BE falls into the “interesting but useless” category.

    But not all of it. F’rinstance in redesigning the new family payments system in 2000 some of those involved argued that it was better to risk underpaying people – even poor people – during the year and present them with a fat “catch up” check later, rather than to do the opposite (risk overpaying them and collect a debt later). They argued from the endowment effect (we value losing what we have more than gaining what we don’t have), while their opponents – good neoclassicists – assumed rational people would prefer the interest free loan of the overpayment.

    The opponents won the policy fight, but experience showed the first group were right – the family payments “debt problem” soon became a major political liability which was only fixed by throwing lots of taxpayers’ cash at it.

  6. christine says:

    Surely, Andrew, the correct answer was: we should run a randomised experiment and see what people actually do, which undoubtedly would include the stuff behavioural economists are worried about, and which would thus negate the need for relying purely on theory which we all agree can’t capture every possible detail of human behaviour. 🙂

  7. Paul Frijters says:

    in some things a randomised experiment is likely to give you the answer. Derrida’s example seems one of them. Where you’d expect strong long-run and equilibrium effects though, experiments are next to useless. How would you for instance experiment with the breaking up of Telstra? You either do it or you dont.

  8. Invig says:

    Sinclair,

    How about I send you my work and you tell me who would publish what.

    I’ve asked Andrew and others and no clue so far.

  9. Keith Birney says:

    Unfortunately, you guys seem to forget that, when dealing with public policy, you are dealing, in our system, with people who are trying to protect their jobs – the hell with some “ideal” policy.
    Because we have saddled ourselves with an adversarial political system he who shouts loudest tends to win.
    Using the Telstra thing as an example only two arguments got a hearing – to privatise it all or status quo. All other possible positions disappeared into the rush to apparent simplicity in a complex situation. (H.L.Mencken: “There is a simple solution to any complex problem; and it’s wrong.”)
    Some other possible positions?
    Is it necessary to change the status quo?
    Privatise the retail arm and retain a public monopoly ownership of the infrastructure.
    Split the retail and infrastructure arms, leaving the infrastructure arm as a public monopoly and having the retail arm as a community (prefer the word) owned corporation in competition with others.
    I am sure there are many others.
    Economic theory, of one kind or another, can be used to justify almost any policy position but is, like any ideology, a great inhibitor of creative diversity.

  10. Invig says:

    Keith,

    Hear fucking Hear.

  11. Pollfoolery says:

    It seems to me that, despite its explosion as a field of interest, behavioural economics is at an early stage. Homo Economicus is a rough tool and one with limitations that are obvious. But the potential alternatives are myriad and occasionally contradictory. I’m hopeful that academic neurologists, psychologists, computer scientists and economists, working together, can find empirically verified models of decision making and that, over time, the policy implications of these will become clear. But when we are talking about the kind of back of the envelope elasticity calculations and econometrics on the run (this is not a criticism!) that needs to inform many policy decisions, the implications are likely to be minor. I think, though, it is a little hasty to write the field off with statements like “we are never going to be able fully to integrate [anomalies described by behavioural economics] into a theory that does justice to each of them”. Imagine if physicists had made a similar decision near the end of the 19th century! The anomalies in Newtonian physics were there… but it took some deep insights and rigorous experimentation to elucidate newer theories which tied them together and gave a new framework to work with. Writing off the relevance of behavioural economics for modelling at this point in time is a little like walking into Einstein’s office as he finishes off the theory of general relativity and asking him what the engineering implications are.

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