Time magazine has a recent article on how the Obama team are making behavioural economics the centre of their financial policies in the hope of altering the behaviour of US citizens. But where are the sceptical voices?
Behavioural economics is primarily an academic discipline where researchers investigate how our cognitive biases divert us from strictly rational reasoning and affect our financial decision-making.
More recently, however, researchers have started touting these findings as a basis for making financial policy. This was most conspicuously done in Richard Thaler and Cass Sunstein’s book Nudge, which the article notes was an inspiration for the Obama campaign.
In fact, the article reveals that several well-known behavioural economists were advisors for the Obama campaign team:
The existence of this behavioral dream team ‚Äî which also included best-selling authors Dan Ariely of MIT (Predictably Irrational) and Richard Thaler and Cass Sunstein of the University of Chicago (Nudge) as well as Nobel laureate Daniel Kahneman of Princeton ‚Äî has never been publicly disclosed, even though its members gave Obama white papers on messaging, fundraising and rumor control as well as voter mobilization. All their proposals ‚Äî among them the famous online fundraising lotteries that gave small donors a chance to win face time with Obama ‚Äî came with footnotes to peer-reviewed academic research. “It was amazing to have these bullet points telling us what to do and the science behind it,” Moffo tells TIME. “These guys really know what makes people tick.”
President Obama is still relying on behavioral science. But now his Administration is using it to try to transform the country. Because when you know what makes people tick, it’s a lot easier to help them change.
And the fact that Obama has picked behavioural economist and Nudge co-author Cass Sunstein to head up the policy tweaking ‘Office of Information and Regulatory Affairs’ office is evidence that behavioural science is being taken seriously in the new administration.
For example, one major problem is knowing how well largely lab-based studies will scale up to whole-population economic systems.
It’s perhaps no accident that almost all the articles cite a 2001 study that found that simply making the US’s 401(k) retirement savings scheme opt-out instead of opt-in vastly increased participation simply because it’s a hassle to change and employees perceive the ‘default’ as investment advice.
But it’s probably true to say that this example has been so widely repeated but it’s one of the minority of behavioural economics studies that have looked at the relation between the existence of a cognitive bias and real-world economic data from the population.
And it’s notable that behavioural economists who specialise in making this link, a field they call behavioural macroeconomics, seem absent from the Obama inner circle.
Akerlof won the Nobel prize in economics for his work on behavioural macroeconomics and Shiller has predicted the tech crash in his 2000 book Irrational Exuberance, and then the housing crash in the second edition.
It is essential to check lab findings against real-world economic data because the responses of small groups of undergraduates should not be the basis of economic policy.
Link to Time article ‘How Obama is Using the Science of Change’.
Link to Economist on behavioural macroeconomics book by Akerlof and Shiller.
Link to Atlantic interview with Akerlof on behaviour and economic policy.
Link to Atlantic interview with Shiller on the same.