Transcript No Slide Title

Is ‘behavioural economics’ economics?
Observations against, for & tied
or
Why Tim finds behavioural economics annoying,
and why he might be wrong
Tim Brennan
Professor, Public Policy and Economics, UMBC
Senior Fellow, Resources for the Future
[email protected]
Australian Competition and Consumer Commission
Melbourne, VIC
24 July 2012
Behavioural economics as challenge to standard
• Broad definition:
Doing economics when people fail to act “rationally”
• Laboratory effects
o Different responses to “logically” equivalent choices (framing)
o Inconsistency with maximizing expected utility
• Real world apparent failure to maximize utility
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Failure to adopt energy efficiency
Voting, donations
Taxi-cabs quitting early on busiest days
Pension contributions differ between opt-in, opt-out
Make par putts more often than birdies
• Requires external judgment that of no cost, no info
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Today’s approach
• Not specifically to challenge evidence, accuracy
o Utility from seemingly non-maximizing behaviour (e.g., voting)
o Relevance of extrapolating from laboratory to market
o Sustainability of mistakes with repetition
• Rather, take an overall methodological view:
What is economics, and how do we do it?
o Kuhnian paradigm shift or more “normal science”?
• Seven arguments against behavioural economics
• Two arguments as ties with the standard approach
• Six somewhat in favour; at least limits to standard
• Normative, empirical, philosophical issues at end
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What is economics? What makes economics fun?
• To some, it’s “data set”
o What can one uncover empirically?
o The IV “Freakonomics” effect; “econ” as social statistics
• To me, it’s the opposite:
Clever (theoretical) explanation of the factoid
• The ability to learn by “thinking about it”
o Math, philosophy, law
• Then, connecting what one learns to policy
o The self-contained efficiency norm
o Thinking about its limits as well
• Does behavioural economics add to MY fun?
• Not really – that’s may be what this is about: ME
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Tim fending off data [“Work, work?”]
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The famous McKinsey CO2 abatement graph
• “Negative” costs on the left
• Economic interpretation: WTP to avoid unobserved
quality degradation
• Psychology, policy interpretation: Look at all the $20
bills on sidewalk
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Economist 3/24/12: “Nudge nudge, think think”
• Even the Economist is on the BE bandwagon
o David Cameron sets up “Behavioural Insights Team”
• More pay taxes with blunt “pay your tax or lose your
car” with photo
• Boys like “geometry;” girls like “drawing”
• More insulation adoption if it comes with cleaning out
attic – “goal substitution” (?)
• US and British but not French reduce energy use if they
see their neighbours doing so
• Force organ donor decision when getting driver’s
license
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Creeping into antitrust
• Maybe blocking mergers?
Stucke: "Behavioural Economists at the Gate"
• But see
“Behavioural Economics and Merger Enforcement: A
Speculative Guide,” Threshold: American Bar
Association Mergers and Acquisitions Committee, vol.
9, no. 2 (2009): 21-29
• Now, the search for something to justify anti-RPM law
Tor and Rinner: "Behavioural Antitrust: A Novel
Approach to the Rule of Reason after Leegin"
• The tar balls are washing up on my beach!
o Wright; Kovacic and Cooper: Recent critiques of BE in antitrust
and regulation
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Against #1: Inhibit disciplinary growth?
• Economics has grown by incorporating seemingly
inconsistent behaviour into the paradigm
o Vertical restraints; resale price maintenance
o Capture theory of government
o Political economy of protectionism
• Imperfect information
o Adverse selection
o Moral hazard and agency issues
• Strategic behaviour; precommitment
• Farmer, Gianakopulos: hyperbolic discounting
• Don’t just assume people make mistakes and move on
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Example: The famous Sunstein-Thaler “Nudge”
• New hires adopt retirement plan out of wages at 20-50%
if opt-in; at 80% if opt-out
• Taken as indicating irrational inertia, as the costs of
making the decision (opt in or opt out) negligible
• Neglects rational inference from standard practice:
What can one infer from something being “standard”?
• Does not imply optimal outcome
o Information cascades
o Inertia in standards adoption
• But does imply that irrationality not necessary
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Against #2: Information or error?
• Can we tell rationality failures from too little
information?
• Failure to adopt energy efficiency: Too “dim” to
calculate benefits, or unaware of benefits?
• Rational choice not to acquire perfect information
o Expected benefits aren’t worth costs
• Strategic ignorance to maintain credible responses
• Becker-Stigler: Can’t even reject different preferences;
could be information
o Those who don’t like classical music don’t have “information
capital” necessary to derive utility from it
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Against #3: Multiplicity of theories?
• Is there a unified theory? Prospect theory/loss
aversion, or
• Jay Shogren’s list of aversions:
• Risk aversion
• Loss aversion
• Myopic loss aversion
• Ambiguity aversion
• Inequality aversion
• Lying aversion
• Guilt aversion
• Regret aversion
• Disappointment aversion
• Stress aversion
• Extremeness aversion
• Delay aversion
• Recession aversion
• Innovation aversion
• And so on…
• It gets better:
Try these cognitive biases on for size!
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Against #4: Publish or perish?
• Is the demand for behavioural economics arising from
the need for:
o More accurate explanations of the evidence?
o A simpler, easier to apply theory?
o Better conformity to intuition?
• Or a response to the demand for a new source of
publications needed to secure academic positions?
• Post-modernist literary criticism of the classics?
• Not the first in economics, to be fair
o General equilibrium? 1960s – 1970s
o Game theory? 1980s – 1990s
o IV studies, the “Freakonomics effect”? – 2000s
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Against #5: What’s the normative standard?
• Standard economics supplies policy norm
• Valuation as area under empirical demand curve
o “Consumer surplus without apology”
• What if demand curve can’t be trusted?
o Revealed WTP isn’t “real” WTP?
• “Negative cost” climate adaptation as example
o Energy efficiency error
o People better off with forcing them to take an option to which a
better one was revealed
• How do we do CBA? What goes in its place?
o “Optimal Energy Efficiency” Energy Policy – maybe?
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Against #6: Elites or the public?
• If not revealed preference, then which preference?
o Full information?
o No cognitive impairment?
o No “bias”?
• Who determines information, cognitive skill, bias?
• As Al Franken once asked, “Why not ME?”
• Cooper/Kovacic: Behavioural biases of policy makers?
• Also a problem if preference change is a policy tool
o Which preferences to use to evaluate policy?
o Ex ante, ex post, or the policy maker’s?
o “Green Preferences,” Ecological Economics
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Against #7: Ex post anti-economic policy?
• Which comes first –
the policy preference or the justification?
• Mistrust of markets for lots of reasons
o Doubts regarding competition
o Non-economic norms
o Unwillingness to defer normatively to revealed preference
• Does behavioural economics fulfil demand for antieconomic policy prescription?
• Why can’t one argue directly from normative principle?
o Utilitarianism, qualified
o Rawls, Harsanyi, Sen
o Inalienability theory of ethical rights
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Tie #1: Standard economics shares similar flaws
• Economics also has long list of adaptations
• Rationality as logical re means, not substantive re ends
• Utility maximization as unrejectable tautology
o From “self-interest” (narrow) to “present-aim”
o Voting: Preference to vote
o “Warm glow”
• The “auctioneer” in general equilibrium theory
• “Transaction costs” as ex post rationalization for
institutional organization, common law
• Folk theorem in repeated games
• Dozens, hundreds (?) of strategic games
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Tie #2: Bad sales job to standard economists
• Why not call this “imperfectly performing investments
to reduce costs of thinking”?
o Decision rules-of-thumb that can be fooled
• No worries in standard economics with modelling
imperfect investments to reduce costs of physical labour
o Irrational to wait for an elevator rather than take the stairs?
• Internal “transaction costs” make baseline important
o Usual ones make property rights assignment important
o Standard economics => inside head, Coase theorem applies
• But do behavioural economists want to convince
standard economists, or get others to reject them?
o Complement or substitute?
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Example: Foreseeable misuse
(Credit: Severin Borenstein’s defence of policies to
promote energy efficiency)
• Legal doctrines to assign choice responsibility away
from consumer – foreseeable misuse
• Holding lawnmower company liable for no foot
protector—even when someone mows lawn in bare feet
• Is the cost to the lawnmower company of avoiding the
accident lower than “cost” to the consumer?
• Cost of “thinking about it”? [Also Economist examples]
o Explain “behavioural” anomalies as costs we can model?
o Is “behavioural economics” really nothing new?
o BUT: Can these costs be independently measured?
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For #1: Relative vs. absolute preferences
• Not necessarily outside the standard paradigm, but
close
• My utility depends on your consumption, adversely
• Robert Frank: Can competition to win be wasteful?
o Just drives up the cost of being first
• May be efficient in some endeavours
o Sports contests – don’t worry about wasted effort by losers
• Progressive taxes don’t reduce social welfare
o Just reduce price of unique goods pursued by wealthy
o Big fish, small pond – wage explanations
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For #2: Preferences over preferences
• “Metapreferences”
• Can prefer X to Y, but also prefer “I’d prefer Y to X” to
“I’d prefer X to Y”
• Wish I were different than I am …
… hard to imagine as that may be … ;-)
• Smoking, dieting, exercising
o Also weakness of will, coming up
• Investment in preference change
o Education, travel, moving, job
o Advertising as “preference pollution” (David George)
• Bring some preference change inside the paradigm?
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For #3: Preference formation and change
• Preferences: Raw data, or something to be explained?
o Presumably, they come from somewhere: blue jeans
• Sagoff, others: Do preferences exist prior to choice?
o Interpretation of “preference reversals,” framing
• “Authentic” vs. “manipulated”, e.g., advertising
• “False consciousness”; e.g., dissatisfaction with
political outcome
• “Going green”: Manipulating preferences as policy tool
o Why not manipulate preferences to make “problem” go away,
e.g., get people to not care about environment
o Elites, powerful dominate
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For #4: Hyper-rationality
• (Thanks to Bob Majure and Joe Farrell)
• Is it reasonable to assume “rational” outcome with
complex repeated sequential games?
o Especially with perverse outcomes—Backward induction
example
o Farrell critique of articles claiming no exclusive dealing that’s
renegotiation-proof
• Does anyone really think price fixing is supported (or
countered) by the folk theorem?
o Act “as if” they understand Myerson, Tirole, Milgrom, etc.?
•
But is it cognition cost, or transaction costs?
o The problem with renegotiation equilibria is that one can’t
endlessly renegotiate
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For #5: Economics “welfare” vs. normal welfare
• No genuine “welfare” test in normal sense of the word
o May be reasonable to presume harm from lost opportunity to
get to higher indifference curve
• Neoclassical requires unstated psychological
assumption that revealed preference is meaningful
o Assume plants have “utility” from light--does that create
obligation to give them light?
• Economists can’t understand question; philosophers
can’t imagine why one would presume meaning
• Happiness studies?
o Risk of paternalism, elitism, remains
• Behavioural economics as questioning inference of
“real” willingness to pay from revealed preference
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For #6: Weakness of will
• What does it mean to act against one’s will?
o “Freedom of will and the concept of a person” – Harry
Frankfurt; conundrum in philosophy
• Jon Elster, Thomas Schelling
o Ulysses and the Sirens; “The Intimate Contest for SelfCommand”
• Multiple selves and the problem of precommitment
o The roommate/refrigerator story
o Elster: Failure to exercise as “free riding” by multiple selves
o Knowing I’ll buy a car on impulse, support regulations
requiring minimal quality – with no other “market failure”
o Rationale for drug laws?
• Whose preferences count? Can’t get away from that!
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Big picture #1: What is economics—theory or data?
• We all know junior high school “scientific method”: If
conflict between data and theory, choose data
• But conflicts between data and theory should be
decided in favour of one with greater a priori confidence
• Quantum mechanics forced rejection of Newtonian
categories (instant action at a distance, uncertainty)
o Feynman: “If quantum mechanics makes any sense, I haven’t
explained it correctly”
o Eddington: “It is also a good rule not to put overmuch
confidence in the observational results that are put forward
until they are confirmed by theory”
• Economics differs? Theory could win because
confidence in data weaker (standard compromises)
o Acting on the basis of theory: US v. AT&T
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Big picture #2: Is this a paradigm shift?
• Kuhn: “Science” doesn’t just incrementally build
o It can, of course: What he calls “normal science”
• Punctuated by revolution
o Incompatible paradigms, not accretion of knowledge
o Definitional changes, e.g., Newtonian vs. relativistic mass
o Change may be generational
• Einstein refusal to accept quantum mechanics
o Many refused to call quantum mechanics “physics”
• Behavioural economics “normal” or “revolutionary”?
• Shift from economic theory to empirical psychology?
• Looks like an attempted paradigm shift to me:
Lead, follow or get out the way?
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Big picture #3: Help or impede other disciplines?
• What to do about mistakes – and how do we know?
o Normative? Cognitive?
• Philosophy:
o Substituting logical categories (“multiple utility”) for
independent normative assessment?
o Are consumers empirically mistaken or ethically mistaken?
• Psychology:
o Does this get you at the policy/research table?
o Does something have to be called “economics” to matter?
• Would/should I care if one said “economics covers this,
psychology covers that?”
• If not economic imperialism, “economists imperialism”
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Big picture #4: Not just energy efficiency
• Increasing research based on “barriers” to energy
efficiency adoption
• To make credible and non-elitist, need to be general,
not just energy efficiency:
Explain why we pick the wrong:
o
o
o
o
o
Doctors
Houses
Cars
Jobs
Investments
• These are WAY more complicated than CFLs, caulking
• Shows one is throwing out more than the bath water
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The bottom line
• [If cost-benefit analysis is still permissible]
• Benefits of behavioural economics
o Perhaps better empirical confirmation
o To many, more salient explanations
• Costs of behavioural economics
o Sacrificing an internally consistent policy norm: Aggregate
revealed preference
o Justifying paternalistic rationalization over revealed preference
o Giving up “thinking like an economist” – Interpretive theory
vs. empirical description
• Do the benefits exceed the costs?
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If consumer sovereignty still matters,
you tell me
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