Are we relying too much on behavioral economics?

George Loewenstein and Peter Ubel say yes.  Often there is no nudge-based free lunch and we need a straightforward relative price shift:

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.

There is much more here, hat tip to Mark Thoma.  Loewenstein, of course, is one of the pioneers of…behavioral economics.  (If you're wondering, I don't agree with a number of their examples, but I do agree with their overall point.)

Comments

Finally, someone tells the emperor that he has no clothes. Some of the behavioral econ stuff I have seen recently has been ridiculous.

I think you are not "relying" on behavioural economics "enough" in economics.

It is used all the time in marketing to make money, but not used in classical economic models because it would challenge the model's premise: the rational consumer.

I think it is the failure of modern economics to incorporate more testable behavioural hypotheses in empirical macro and micro which signals how far removed econ has gotten from the real economy. How can you have finance firms use behavioural economics in attracting, retaining and milking consumers without incorporating behavioural economics into modeling financial markets.

Be an empiricists and forget about making the sign of the cross and genuflecting at classical economic models. Incorporate more of behavioural economics into your work, and test for it.

Behavioral economics is overstated all the time.

The markets tests economic ideas everyday - much better then contrived lab experiments.

If companies want to test various marketing plans based on "research" or voodoo - well go ahead and then let the market decide.

However having the government try to manage people like lab rats is a game for despots not a free people. The use of psycho babble to decide macro policy should be strictly limited. The silly nudge rules are just another way to pave the path the hell with good intentions.

George Lowenstein is the Emperor.

There it is, exactly as predicted: the nudge had become a push. And the push will become a shove.

I drink sugary beverages and don't have a problem because of them because I exercise regularly. A free-market, efficient, and fair policy response would be to ALLOW health and life insurance companies to charge higher premiums on fat people. Obesity is a leading cause, contributing or complicating factor to many of the major illnesses and injuries we have in this country. If we need to tax, tax body mass index. American life expectancy isn't relatively low because of poor health care; it's because of poor diet and exercise.

A tax on sugary beverages will change little behavior but fill the coffers of government with yet another permanent set of tax revenues upon which to spend. The profit margin on soda is huge; the contents often cost less than the container. Politicians have seen deep pockets and their in a lather.

As for leadership, maybe we need an obesity tsar and Surgeon General who aren't double-wides.

It seems to me that sugary beverages are the worst example for their case. Would consumer behave as in standard textbooks, there would be no need for any state intervention on the matter: people would just rationally choose sugary drinks, meaning they prefer sugary drinks with the possible cons coming with them (now or in the future) to alternative (and possibly healthier) use of their money.
State intervention is only legitimate if we believe it is not the case (due to inconsistent intertemporal pref., self-controle issues, or simply because consumers don't really have well defined pref.). Any of these explanations need something along the lines of behavioral economics to make sense.
And I don't think that anyone in behavioral economics more or less claimed that in general monetary incentives are useless... (and sensitivity to monetary incentives is not equivalent to rationality, the latter implies the former but the reverse is not necessarily true)

By the way, where's the third choice? You can either tax sugary drinks, subsidize non-sugary drinks OR you can stop subsidizing corn producers. Because there's no actual sugar (the white stuff) in most sugary tasting sodas. It's corn syrup. It seems the government is looking for a solution to a problem it created.

I don't think I've ever read a behavioral economics study that caused me to think people behave irrationally. Sometimes it just doesn't make sense to spend a lot of energy making a decision.

Am currently reading: Why Smart People Make Big Money Mistakes and How to Correct Them: Lessons from the New Science of Behavioural Economics (Simon and Schuster) by Belsky and Gilovich, which does a pretty good job of summarizing some of the beahvioural and psych literature.

You might enjoy reading it.

DPR:

What is your authority to support the bald statement that "taxes on consumption is part of classical economic theory but it has been collected under the rubric of behavioral economics".

Show me the source for that statement: that taxes on consumption is behavioural economics.

Just because you say it, doesn't make it so.

The assymetry of gain versus losses (loss aversion) plays a large role in behavioural economics: that the assymetry of loss outweighs a potential gain.

Here is an interesting use of behavioural economics that shows the contrast between the tax approach and a self-motivated behavioural economics approach as it relates to obesity:

http://www.tutor2u.net/blog/index.php/economics/comments/questions-in-behavioural-economics-combatting-obesity/#extended

"People know what they do; frequently they know why they do what they do; but what they don't know is what what they do does."

— Michel Foucault (Madness and Civilization: A History of Insanity in the Age of Reason)

I'm not a fan of the general trend - most extreme in Behavioral economics - that people are "irrational", "act foolishly", etc.

They are foolish perhaps in a deeper sense, to what Foucault alludes to above.

Andrew, The reason I threw out the challenge to DPR to support his claim that a sugar/softdrink tax is behavioural economics is that Ubel, in his book, rejected behavioural economics as sufficient, and, TA DA, proposed a classical economics tax because behavioural stuff wouldn't work.

It was interesting to watch how this thread developed, though, in this post.

Here is part of an Amazon review of his book:

"Professor Ubel is more controversial in Free-Market Madness. When people might systematically make bad choices about their own lives, he sees no problem in more-forcibly trying to sway them to the right side. Big Macs are bad for you? Tax them (similar to what New York's governor is proposing, as it happens). Advertisers are peddling junk food to kids on Saturday-morning television shows? Stop them from doing it.

These policy ideas are shoved toward the end of Free-Market Madness; it really seems as though Professor Ubel was embarrassed to include them. Consequently, there's no solid rationale for a lot of what he proposes. He arbitrarily tosses out the idea of a 10% tax on a certain extremely unhealthy burger, but where did that number come from? And wouldn't it in fact be a regressive tax, as Marion Nestle noted in the context of New York's proposed soda tax? Poor people eat worse than wealthy people; these taxes will harm them disproportionately."

Most legislation guided by behavioral economics is fundamentally flawed, as it rewards irrational behavior and punishes rational behavior.

The observation of behavioral economists that many people act irrationally does not excuse said behavior. The reality is that people act in a variety of ways. Moving the goalpost will not prevent people from acting in a variety of ways. It will just ensure that in aggregate, behavior becomes *more* irrational.

"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."

I love this sentence, because it shows that economics and ideology/politics so often intertwine. You only can come to the conculsion that the price difference between sugar and sugar-free is so and so IF you have a pre-disposed position on it that is NOT justified by economics alone. And then you take up behavioral economics to drive your point home how best to go about your perceived social engineering goal. It reminds me a bit of eugenics that used racial theory and IQ and crime statistics and what not to justify regulating and controlling a minority... Ugly stuff, imo.

Instead, we could apply ancient economics and just say: Well, the price signal on sugar might be WRONG, because we already regulated repercussions of the second-order (health-care costs, insurance costs etc.). We don't even have to use BEhavioral Economics and a perceived elitist mind-set of WHAT SHOULD BE RIGHT FOR SOMEONE ELSE and then regulate towards this goal.

I am sorry, but this is exactly the kind of thinking that was around at the beginning of the 1900s and it was disgusting and racist.

"However having the government try to manage people like lab rats is a game for despots not a free people."

Discussing the empirically observable results betweeen choice architecture with and without Pigovian taxes is the easy part.

Dealing with folks who want to feel free, neuro and social science insights be damned, is the hard part, it seems to me. The best model of reality makes a lot of people sad, and they want to be happy or some other emotion. They want the magic of "free people" management. Personally, I'd say fuck them but as hecklers they're a real force in our reality.

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