New York Times
June 28, 2003
Calculating the Irrational in Economics
By STEPHEN J. DUBNER
When the Federal Reserve Bank of Boston invited the leading
behavioral economists to a Cape Cod golf resort this month to make their
case,
it was plainly a signal moment. "It has the feeling of being summoned by the
king," said Colin F. Camerer, a star behaviorist who teaches at the
California
Institute of Technology. "Sort of like: `I understand you're the finest lute
player in the region. Will you come and play for me?' "
Until the last few years, behavioral economics - which blends
psychology, economics and, increasingly, neuroscience to argue that emotion
plays a huge role in how people make economic decisions - was an extremely
tight-knit group. It had little influence and few practitioners. One
economist
at the bank's conference recalled an Alaska kayaking trip that Mr. Camerer
took
with another prominent behaviorist a decade ago. "If that kayak had
flipped,"
he said, "half the field would have been eradicated."
But the field has grown, as has its influence. In 1996, Alan
Greenspan's warning of "irrational exuberance" acknowledged, as the
behaviorists do, that the average investor is hardly the superrational "homo
economicus" that mainstream economists depict. In 2001, the young
behaviorist
Matthew Rabin won the John Bates Clark Medal; last fall, the psychologist
Daniel Kahneman, a forefather of behavioral economics, was awarded the Nobel
in
economic science.
And so it was that the Boston Fed summoned the behaviorists to
the
Wequassett Inn in Chatham, Mass. The conference was given the quaint title
"How
Humans Behave," as if monetary policymakers had suddenly realized that, lo
and
behold, on the other end of all that policy are actual people. The
collection
of mainstream economists and central bankers would be the highest-level
audience the behaviorists had ever enjoyed, the best chance yet for their
new
thinking to hit the bloodstream.
From the outset the mood was civil, especially considering that
the
behaviorists are essentially calling for an end to economics as we know it.
(As
one economist grumbled, "What you have to understand is that behavioral
economics is attacking the foundation of what welfare economics is built
on.")
So it was not surprising that some Fed elders seemed wary, as if they were
at a
family reunion and welcoming a distant cousin about whom they had heard only
puzzling rumors. But with the economy stuck in a condition between dismal
and
desperate, the behaviorists' timing could not have been better.
"All our models and forecasts say we'll see a better second
half,"
Cathy E. Minehan, president of the Boston Fed, said in her opening address.
"But we said that last year. Now don't get me wrong: mathematical models are
wonderful tools. But are there ways this process can be done better? Can we
inform the policymaker from 50,000 feet with wisdom gained on the ground, in
the human brain, or in the way humans make decisions and organize
themselves? I
hope so."
Ms. Minehan and her colleagues were particularly hoping to learn
why Americans save too little, acquire too much expensive debt and perform
such
achingly self-destructive feats of portfolio management. The behaviorists,
for
their part, were put in a tight spot: eager to prove themselves but leery of
overpromising. "Virtually everyone doing behavioral economics agrees we
should
go slowly in advocating policy change," Mr. Camerer wrote in the paper he
presented. "Our thinking was also not designed to precisely answer questions
about welfare and policy, but this is a good time in the intellectual
history
of the field to say something."
Eldar Shafir, who teaches psychology and public affairs at
Princeton, began with a behavioral economics primer. It was full of the
anomalies the field is known for, including the popular "6 jam-vs.-24 jam"
experiment. In an upscale grocery story, researchers set up a tasting booth
first with 6 jars of jams, and later with 24 jars. In the first case, 40
percent of the customers stopped to taste and 30 percent bought; in the
second,
60 percent tasted but only 3 percent bought. The point is that too many
options
can flummox a consumer - and if 24 jars of jam pose a problem, imagine what
8,000 mutual funds can do. Standard economics would argue that people are
better off with more options. But behavioral economics argues that people
behave less like mathematical models than like - well, people.
Among the behaviorists, there is the common sentiment that
economics has been ruined by math. "Neoclassical economists came along in
the
mid-19th century and wanted to mathematize the new science of economics,"
said
George Loewenstein, a professo
