Why (Some) Behavioral Economics Bothers Me

Before I launch into my tirade, I want to emphasize that Behavioral Economics is useful and economics has learned a lot from it. Understanding how people actually make decisions and what drives their preferences is important. Economics should be studying preference and choice, and we are.

But....

Some of it is just bluster. I've already criticized behavioral economist Dan Ariely's NYT piece on incentives in this space. He's just choosing to ignore reams of research on how financial incentives work in real firms. I don't know why he is doing this.

Other times, regular old economics gets labeled as behavioral, because it's easier to attract attention that way.

I've seen this a number of times in seminars and journals and the like, but here's an example from the New York Times recently. (And I should note that this article was submitted by a Fin 6250 group for their article discussion assignment --- way to go, group!)

Budgets Behaving Badly

This article is about how behavioral economics can help make better policy. I don't disagree with this claim; everyone should read Nudge for more on this.

But here's the thing: Read the section on how "Medicare separates hospital insurance and drug insurance into different programs." Any time an organization separates responsibility like this, you run the risk of across-department externalities. Here the drug insurance side of things is limiting access to drugs, thinking they're saving money. This, of course, makes people sicker, which means that the costs for the hospital insurance side of things goes up. It would probably be better if the people making the drugs decisions were motivated to care about the hospital side of things, but as of now they're not. Intra-organizational externalities like this are common (see Fin 6250). And they're understandable with regular old, garden-variety, neoclassical economics --- nothing obviously "behavioral" about it.

(Sorry for all the caveats in this post --- but here's another. I doubt it's Dana Goldman at RAND who's marketing this idea as behavioral. I'm guessing here, but probably this is the reporter's doing. I haven't been able to find Goldman's work on this, though.)

I'm of course showing my biases, but I think one reason that behavioral economics is popular is the notion that it's showing that regular old economics stuff is all wrong. "Oh, that economics you took and hated in college? The reason you hated it was because that stuff was wrong anyway because of strict rationality assumptions."

The big problem with college economics isn't that it's wrong; the big problem is that it's taught badly. Teaching regular old economics well is teaching exactly "the study of everyday life as it actually happens," just at Leonhardt wishes for.

On top of that, the big problem with our application of economics to policy isn't that economics is wrong (even though it surely is, at least on occasion); the big problem is that economists (and other social scientists) get ignored too often.