Can behavioral economics cause real harm?

By Felix Salmon
July 15, 2010
taken to the op-ed page of the NYT today to urge politicians to spend less time on nudges and more time making substantive policy changes.

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George Loewenstein and Peter Ubel are about as expert on behavioral economics as it gets, so it’s interesting that they’ve taken to the op-ed page of the NYT today to urge politicians to spend less time on nudges and more time making substantive policy changes.

The problem here is that although behavioral economics can result in policies with positive effects, it can also mean that those policies get put into place instead of ones which really have teeth.

Prime Minister David Cameron of Britain recently promoted behavioral economics as a remedy for his country’s over-use of electricity, citing what he claimed were remarkable results from a study that reduced household electricity use by informing consumers of how their use compared to that of their neighbors.

Under closer scrutiny, however, tests of the program found that better information reduced energy use by a mere 1 percent to 2.5 percent — modest relative to the hopes being pinned on it.

Compare that with the likely results of a solution rooted in traditional economics: a carbon tax would instantly bring the price of energy into line with its true cost and would unleash the creative power of the marketplace to generate cleaner energy sources.

Behavioral economics should complement, not substitute for, more substantive economic interventions.

You can quibble with the specific example here — Barbara Kiviat notes that other studies show greater effects — but conceptually it’s easy to see that any behavioral-economics solution carries with it a potential problem, which interestingly enough might be exactly the kind of thing best studied by behavioral economists.

Consider an issue with two possible lines of attack: a cheap behavioral-economics solution, B, and a more expensive and politically-fraught substantive solution, S. Does implementing B make implementing S less likely? If B didn’t exist, would S be more likely to come about? Surely there are cases where the answer to both questions is yes — and where therefore behavioral economics is a bad thing, not a good thing. The ability to cover up issues with a behavioral band-aid is often just a way of doing as little as possible while appearing to tackle the issue at hand.

That said, in a lot of cases S would never happen anyway, and in those cases B is better than nothing. And in other cases S will happen either way, and again adding B to the mix is going to be a good thing. So the only cases we’re worried about are the ones where the existence of B significantly changes the likelihood of implementing S. I wonder how common that is.

4 comments

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I think the problem is people have been pyschologically prodded towards excess for 25-30 yrs unabated, and that there needs to be reverse conditioning now. Without it, real political will for big reforms and cutbacks is so small as to be infintessimal. I think (believe it or not) that the psyche of America is further along the cutback road than the body politic realizes and – I hate to even think it – the Teabaggers are stronger (if not misguided) than we realize.

Either way, the smart guys said it right – behavioural economics should be regarded as complementary to, not as a replacement for, public policy.

Posted by CDNrebel | Report as abusive

Interesting choice of lettering for your hypothetical example there. Behavio(u)ral economics might make sense if it weren’t being as energetically hyped by some of the biggest wastes of and skin, oxygen and other resources on the planet.

That’s when it biodegrades into frugalist B/S condescension and austerity by any other name. In a dysfunctional democracy, it’s all about who’s pulling whose leg and calling the botched outcome something “we” needed to do.

Posted by HBC | Report as abusive

Implement both the solution will be total BS. Bazing! Left yourself wide open on that one, Felix.

Posted by MitchW | Report as abusive

I think this analysis is a little shallower than it seems. Most problems can be addressed in a variety of ways, and politicians will tend to follow the path of least resistance.
For example, in your formulation you could let B equal tax incentives and you’d get the same result, as tax incentives are not as powerful as more sweeping measures.

Posted by RZ0 | Report as abusive