The Atlantic has an article decrying the fact that economists are refusing to give behavioral economics a bigger role in introductory economics courses. I’m going to argue that this oversight is actually appropriate, even if behavioral economics provides many true observations about behavior.
The core ideas of economics are extremely counterintuitive and are not accepted by most people. Thus economists face a difficult challenge in teaching the subject to non-economists. As an analogy, quantum mechanics seems very counterintuitive to me, and thus I have great difficulty in understanding the subject. It’s hard work teaching basic economics.
Most people find the key ideas of behavioral economics to be more accessible than classical economic theory. If you tell students that some people have addictive personalities and buy things that are bad for them, they’ll nod their heads. And it’s certainly not difficult to explain procrastination to college students. Ditto for the claim that investors might be driven by emotion, and that asset prices might soar on waves of “irrational exuberance.” Thus my first objection to the Atlantic piece is that it focuses too much on the number of pages in a principles textbook that are devoted to behavioral economics. That’s a misleading metric. One should spend more time on subjects that need more time, not things that people already believe.
The article suggests that behavioral economics could be very useful to policymakers. I see little evidence for this claim. The author mentions the housing bubble, but how would behavioral economics have helped policymakers in that scenario? If even the “masters of the universe” on Wall Street struggle to come up with behavioral finance theories capable of beating the market, does anyone seriously believe that bureaucrats in Washington will be able to “market time” well enough to spot asset price bubbles and regulate accordingly? If so, we should provide them with a nest egg to invest and tell them that from now on they’ll earn no salary, rather they’ll have to survive on their profits from shorting asset price bubbles.
Seriously, the problems in 2008 were due to things like moral hazard in the financial system and unstable NGDP growth, which are well covered by conventional, non-behavioral economics. And even if housing prices in 2006 were a bubble, it certainly didn’t cause the 2008 recession. The Fed could have offset the effects of the housing slump with easier money in 2007 and 2008.
Politicians already tend to believe behavioral economic theories. Indeed there are many public policies that are almost entirely based on behavioral economics, most notably the war on drugs. Politicians believe that people foolishly consume addictive drugs, which is why they have enacted laws that led to the imprisonment of 400,000 Americans in an attempt to stop this “irrational behavior”. Has it worked?
Behavioral theories are sometimes used to justify policies that encourage saving. And indeed some companies now make the adoption of a company pension the default option for newly hired employees. Unfortunately, our government actually has a policy of discouraging saving. Behavioral economics tells us that public policy should be more pro-saving, but then so does conventional economics.
Whenever I speak with non-economists, they almost always seem more enthusiastic when the discussion comes around to behavioral economics. “That’s what economists should focus on!” They all seem to think that economists assume too much rationality, and that we should switch to a more behavioral approach. But here’s the problem. Non-economists also tend to reject the central ideas of basic economics, and for reasons that are not well justified. For the economics profession, our “value added” comes not from spoon feeding behavioral theories that the public is already inclined to accept, rather it is in teaching well-established basic principles of which the public is highly skeptical. Thus we should try to discourage people from believing in the following popular myths:
1. People don’t respond very strongly to economic incentives. (I.e., the demand for life-saving drugs is very inelastic.)
2. Imported goods, immigrant labor, and automation all tend to increase the unemployment rate.
3. Most companies have a lot of control over prices. (I.e. oil companies set prices, not “the market”.)
4. Policy disputes over taxes and regulations are best thought of in terms of who gains and who loses.
5. Experts are smarter than the crowd.
6. Speculators make market prices more unstable.
7. Price gouging hurts consumers.
8. Rent controls help tenants.
These myths are all widely believed by the general public. Teaching behavioral economics is not a good way to get people to “think like an economist”, indeed it gets in the way. Our primary goal should not be to add new information, it should be to have people unlearn false ideas about the world. I’m not knowledgeable enough to have a good overview of the utility of behavioral economics. But even if it is useful it doesn’t really belong in a principles of economics course, except as a way of briefly acknowledging that the rational choice model is a useful fiction and not a perfect description of human behavior. We first need to teach basic economic principles.
That doesn’t mean that I agree with the way that economics majors are currently being taught. Our intermediate level courses are far too theoretical; they waste students’ time on lots of minor theories that would only be useful for people planning to do graduate work in economics. (Most students do not.) Too many homework problems with Cobb-Douglas utility, Hicksian demand, marginal rates of substitution, Giffen goods, gross substitutes, indifference curves, etc. Some of that is appropriate, but all economics courses should focus heavily on applied economics. Outside of grad school, every course should be taught as if it’s the last time students will ever encounter those theories, because it usually is. Just teach enough theory for students to handle the applied courses in their major.
When I was young, an intermediate micro textbook by Deirdre McCloskey was less mathematical than many current books, and did a nice job of providing an interesting set of applications. When I look at what young economics students are forced to learn today, I feel sorry for the millennials.
Indeed we’d probably be better off using principles texts for our intermediate economics courses. Teach out of the exact same book as in the principles courses, but do so at a higher intellectual level. Just as a literary scholar might re-read Hamlet 50 times, each time gaining a deeper understanding.
READER COMMENTS
David Henderson
Dec 28 2018 at 12:59pm
Scott, This is first-rate.
One of my favorite lines, although it was hard to choose because there are so many:
And it’s certainly not difficult to explain procrastination to college students.
Brian Donohue
Dec 28 2018 at 1:51pm
Great post, Scott.
Behavioral insights around “choice architecture” are fun and useful, and I think Kahneman’s work is great and Thaler is pretty good, but it’s a curious sidelight to the study of economics, not something that overthrows the core of economic thinking, as many hope.
Great impact on 401(k) decisions, and I for one appreciate “truth in lending” requirements, which is a lifeline in navigating a mortgage, but these successes have not been replicated elsewhere.
Philosophically, the question of who is the “me” that makes decisions (impulsive “me” versus responsible “me”) is glossed in economic teaching but we all feel this internal struggle. Seems to me behavioral economics is about helping us decide in accord with the better angels of our nature, which is a good idea with potentially paternalistic overtones.
Evelyn H
Dec 30 2018 at 8:27pm
Thaler is just pretty good? That Nobel tho.
Jon Murphy
Dec 28 2018 at 3:45pm
I do touch a little on behavioral economics when discussing market failure. But I touch on it more as a caution against so-called “optimal” policies like optimal tariffs, optimal wages, carbon taxes, etc. If we are assuming that market participants fall prey to behavioral influences and biases, then we must also assume politicians, regulators, analysts, and the like also fall prey to anti-foreign bias, or anchoring, or any other of these things.
To your point about intermediate textbooks, I agree wholeheartedly. I don’t know Deidre’s book, but I do know University Economics and its new release, Universal Economics. When I get the chance to teach intermediate micro, I’m going to assign it. It’s a very intuitive book.
Jon Murphy
Dec 28 2018 at 3:46pm
Oops, forgive my mistake with the block quote above. Only the second paragraph should be in quotes.
Iskander
Dec 28 2018 at 5:01pm
The thing that amazes me is that after 20 years of the behavioural economics revolution there are very few important insights from the field. How many major useful (not to mention replicatable) conclusions can we draw from behavioural econ?
bill
Dec 29 2018 at 1:52pm
Every single article on behavioral economics uses the 401k example. A great insight for sure, but there’s a reason every single article mentions it.
Jon Murphy
Dec 29 2018 at 6:49pm
It’s super helpful in finance
Jack
Jan 4 2019 at 5:44pm
How is it helpful in finance?
Jairaj Devadiga
Dec 28 2018 at 5:55pm
Teach out of the exact same book as in the principles courses, but do so at a higher intellectual level. Just as a literary scholar might re-read Hamlet 50 times, each time gaining a deeper understanding.
This. I still re-read basic texts such as the The Wealth of Nations or Bastiat’s Sophisms of the Protectionists and find some new insights. There is no need to waste time on esoteric mathematics that most students will never use, while there’s a wealth of insights to be had from the basic books.
Kurt Schuler
Dec 28 2018 at 6:23pm
McCloskey’s fine book, The Applied Theory of Price, is available free on her Web site:
http://www.deirdremccloskey.com/docs/price.pdf
Kevin Erdmann
Dec 28 2018 at 6:28pm
It is funny how focused behavioral econ is on market distortions when it seems like there are countless applications for it in public choice theory. At some level, most policy in practice is the manifestation of shared attribution error.
Behavioral econ explains tight lending regs today much better than it explains home prices in 2005.
Benjamin Cole
Dec 28 2018 at 7:43pm
Most non-economists also support property zoning.
But oddly enough, I think most conventional macroeconomists generally abide by property zoning. Do we need to apply behavioral economics to explain this anomaly?
It seems to me a large increase in immigrant labor would tend to increase unemployment rates. Or a reduction in labor rates. Is this an example where the intelligence of the crowd exceeds that of the experts?
I wonder if there is a valuable role of what I think is behavioral economics in explaining national economic growth. In Germany, for example, wheat production per hectare is roughly double that of the United States, Australia or Canada or the Ukraine.
Surely, German culture has something to do with German economic success. Do simple ideologies or theories explain German economic success?
Syria adopted certain market reforms under IMF pressure. The nation later collapsed in part because adhesion to the state had been decreased.
Would behavioral economics explain why the US remains globally competitive in agriculture, healthcare, aerospace, defense, and technology? All of these industries are heavily intertwined with government.
The world is an interesting place.
Plato's Revenge
Dec 29 2018 at 4:06pm
Ben, you keep going on about German wheat, and somehow I can’t add any more comments to the other post… I’ll write a long one in case it’s the same this time
Ukraine is MUCH less densely populated than Germany. The number you quote is likely for the Donetsk region, Ukrain has 80 ppl/sqkm, vs. Germany’s 230. (Your BS filter should have caught that one)
Ukraine and the other countries you quote are traditional bulk exporters of wheat. Ukraine used ot be the breadbasket of Europe (before the communists took over). Germany didn’t even produce wheat a few decades ago; it’s only made possible by breeding new sorts
But (densely populated) Germany is (amazingly) producing surplusses in all kinds of foods; wheat is just a minor afterthought to its agriculture. It even produces biofuels
Unsurprisingly, if they’re to produce wheat at all, German farmers have to do it with super intensive methods. That’s not better or worse than other methods, it’s just a necessity in Germany. It doesn’t prove anything (except that econ 101 works in this field, as in others)
But again, wheat is a maginal product for Germany; you shouldn’t measure its economy by it
Of course, Germany also has a great economy in most fields it’s active in
However, it’s not that different from similar countries. Your wheat example completely fails to prove that it is
You have to control for important production factors like peace, availability of captal, settled property rights, an educated populace. These are only determined by culture in the long term, but they work immediately to produce good economic results
Will German culture keep these factors for the future. I certainly hope it, and think it likely, but nothing you observe today easily proves it
Why you assume Germany government has that much positive impact on German culture or its economy is beyond me. Unless you note that German government rejects all imperialism and thereby avoids the main reason for its cancerous growth
But somehow you seem to but great faith in (some) governments’ positive wisdom. I think there is very little evidence for that, and you certainly don’t give any
michael pettengill
Dec 30 2018 at 5:09am
Immigrant workers are never, or will never be consumers?
Seems to me an immigrant worker adds more to GDP by consuming at a higher rate than a kid of middle class parents entering the labor force. Already starting out with most of the stuff to live well, the kid wont be focused on building the stock of durable goods the immigrant with nothing needs.
What I find most disturbing in the way econ is taught compared to the 60s is its not a zero sum closed circle. Instead, its presented as if workers and consumers are totally independent. That workers can be reduced while consumers increased.
I’m a physicist and engineer, so for every input there is an equal output, for every benefit, and equal cost. To increase benefits, outputs, costs, inputs, must increase.
I’d say the defining character of Trump voters is the promissed free lunch of greater benefits from cost cutting never materialized. Trump promising infrastructure at zero cost was very appealing because whats especially lacking in the rural and much of the rustbelt is infrastructure, whether classic roads, bridges, levies, water and sewage, or that of communities, like colleges, hospitals, churches. Such things consume all idle labor in an efficient econony, with the output being increased community wealth.
Historically immigrants build parallel infrastructure which serves specific needs that spill over into the wider community. Eg, Jews create the kosher food chain, the Chinese theirs, etc.
But the post WWII and cold war turned many into immigrants, moving people from the south to north, east to west, etc. As a kid of the 60s, chicago blues, motown, as well as the multiverse british invasion were the fruit of immigration (GIs to Europe).
Of course, if blues, rock n roll, motown are devils music, immigration is evil. Without African immigrants they wouldn’t exist.
Russell Nelson
Dec 30 2018 at 8:49pm
What I find most disturbing in the way econ is taught compared to the 60s is its not a zero sum closed circle.
Let me ask you a simple question: If you are in a laundromat with a dollar bill, and you change that dollar bill into four quarters, are you better off, the same, or worse off? Have the number of atoms involved changed?
Scott Sumner
Dec 28 2018 at 11:43pm
Everyone, Lots of good comments, not much to add.
Ben, Over the past 200 years, the US has received far more immigrants than Canada and yet has a lower unemployment rate.
Justin Jack
Dec 29 2018 at 8:08am
There’s no particular reason to go over behavioral economics in an intro class; it’ll just serve to confuse rather than enlighten. And I can head off most student objections by pointing out that self-interest does not mean heartless Terminator-style adding machines. I love to quote Becker here. What is meant by rational behavior? Consider first what is not meant. Certainly not that people are necessarily selfish, “economic men” solely concerned with their own well-being. This would rule out charity and love for children, spouses, relatives, or anyone else, and a model of rational behavior could not be so grossly inconsistent with actual behavior and still be useful.
Mark
Dec 29 2018 at 8:21am
Behavioral economics also seems very culture-specific whereas traditional economics creates many universal insights (largely by treating the concept of utility as a black box where culture can fit).
A related issue is that the flaws in rationality posited by behavioral economics may not be exogenous. Culture isn’t exogenous; for example, North Korea and South Korea probably had very similar cultures in 1945 and very different ones today. The same could be said for China and Taiwan in 1890, or China and Japan in 1830. The cultures in those respective countries changed because of the different institutions and conditions in them. Similarly, if institutions treat people as rational beings and expect them to act as so, then culture can change in a more rational direction.
Dylan
Dec 29 2018 at 9:44am
I don’t disagree exactly, but I think it is important to at least acknowledge the insights of behavioral economics when teaching basic economic theory, because otherwise students who don’t go far in economics are just as likely to throw out the whole framework when they first come across some empirical behavioral finding that calls into question homo economicus.
One of the things I remember the most from one of my undergraduate economics courses was a question I’d asked one of my older professors after class one day. I don’t recall what the question was, but I think it was something that called into question the rational model of human behavior, which had seemed particularly unsuitable for whatever example he had used. His response was something along the line of “One of the greatest mysteries of economics is why, when no single individual behaves very much like our models suggest they should, yet in the aggregate the models can do such a good job of predicting human behavior.”
That crucial insight I think is missing for a lot of people who study economics, who either internalize the rules of economics and universalize them to individuals, or else discard the whole thing as rubbish because humans don’t act like that.
Mario J Rizzo
Dec 29 2018 at 11:15am
SELF-PROMOTION: Glen Whitman and I will be sending our book manuscript Puppets and Puppet Masters: Rationality, Behavioral Economics and Paternalism to its publisher, Cambridge University Press, in the next couple of weeks. This book differs from many other treatments of behavioral economics because it probes more deeply into the meaning of rationality, the defective evidence in support of biases, and the weaknesses of paternalist policy prescriptions. It has taken quite a few years to write but we hope that readers will think it was worth it.
william butos
Dec 29 2018 at 11:51am
Great post, Scott. Much needed. Let me also give a nod to Mario Rizzo’s critique of behavioral economics.
Sai
Dec 29 2018 at 2:06pm
To disprove the eight myths that Scott lists above, in how many cases is the hyper-rationality assumption required? If one can start with a realistic set of assumptions about human behavior (bounded rationality, people respond to incentives etc) and yet reach these broad conclusions (something that is possible as pointed out by Simon), then they are more likely to be accepted by students and the public. The way economics is taught, most students dismiss it as “theory” and think it belongs only to the classroom.
Nick Ronalds
Dec 29 2018 at 4:49pm
A great post by Scott, an example of the somewhat heterodox thinking we cherish him for (e.g., pointing out that the drug war is an example of behavioral econ that has failed). Others have said (Perhaps David Henderson or Don Boudreaux?) that politicians embrace economic nostrums not because they take the fundamentals of econ 101 too seriously but because they’re ignorant of them. On the contrary, like their constituencies, they often dismiss or deride some of the best-established principles of economics such as the benefits of trade and base legislation on such rejection.
Russ Roberts recently had an episode with Maeve Cohen, who thinks the Global Financial Crisis proves standard economics is deeply flawed, “an abstract theory detached from society”. She and a network of like-minded academics want to change the curriculum to emphasize the power of monopolies and the benignity of government solutions. But like Behavioral Econ, those are ideas that most people already hold. Why not emphasize the fundamentals, and if you want to make econ more realistic, add a few units on Public Choice. Especially Arrow’s impossibility theorem. (Smirking emoji here.)
Julia K.
Dec 29 2018 at 6:00pm
“When I look at what young economics students are forced to learn today, I feel sorry for the millennials.”
NB: Pew and others define Millennials as the group born between 1981 and 1996. As of 2019, that’s 23-38 year olds. Millennials are typically not still in college. Today’s college students are the following generation, often known as iGen.
Ramagopal
Dec 29 2018 at 9:22pm
Scott what is your view on Paul Ormerod’s critique of mainstream economics in his Why Most Things Fail and Positive Linking ? If what Ormerod argues is valid we would have to trash most of what is taught to economics students including the profit maximising rule MC=MR.
Michael Sandifer
Dec 29 2018 at 10:42pm
I can see a point in spending time in behavioral economics in micro, but not macro. Isn’t the point in excluding it from macro is that to think it important is to appeal to fallacy of composition? Macroeconomic phenomena are emergent and mostly approximate rationality even if the behavior of agents do not.
Addressing market failures in macro such as sticky wages, negative externalities, or limits to competition should be sufficient.
Benjamin Cole
Dec 30 2018 at 12:37am
“Ben, Over the past 200 years, the US has received far more immigrants than Canada and yet has a lower unemployment rate.”–Scot Sumner.
On the other hand (and economists have as many hands as needed) Japan has had few immigrants in the last 200 years, and now has a much lower unemployment rate than the US. In fact, there are 1.63 job openings in Japan for every job hunter now, and the Bank of Japan cannot seem to top 1% inflation.
Does text-book economics explain the lack of wage or general inflation in Japan? Or behavioral economics? Or both?
Japan also has a tremendous amount of social cohesion, and consequently much lower outlays for crime and punishment, besides being a nicer place to live than the US.
Japan obtained these positive results while controlling trade and immigration, and through close cooperation of government and commerce. Coincidence or consequence?
The slow growth in Japan in the last 20 years is probably better explained by a too-tight monetary policy than by anything else (although some point out Japan’s growth is okay when measured against the size of their labor force).
I am not sure social cohesion and globalized markets and heavt immigration go together. It is an interesting topic.
I wonder if any nation ever profited in the long-run by importing cheap labor—often due to socials consequences that fall outside the macroeconomics textbooks.
In the US, cheap labor was imported from Africa for several generations. But beyond plantation owners, did this cheap labor improve living standards in the US (especially if one includes the Africans in subsequent living standards)? Did most whites or Native Americans obtain higher living standards—or lower, as they had to sell their services against cheap labor?
There has been social fallout from this importing of cheap labor ever since. Less social cohesion.
The world is an interesting place.
Happy New Year. Remember, smart detectives collect and then reason from facts, then devise a theory or explanation. If you start with a theory, then you subsequently align the fact and “frame” the suspect. You might be right—or you might have the wrong suspect.
Jon Murphy
Dec 30 2018 at 9:25am
Yes, it does. Very easily, in fact. MC=MR. Same way it explains your supposed conundrum about German farming.
Bruce Nickerson
Jan 7 2019 at 2:22pm
Mr. Cole notes (with what I interpret as approval) that Japan has a much lower unemployment rate than the U.S., with “1.63 job openings in Japan for every job hunter”. To what extent is this a result of Japan’s demographics – a drastically shrinking and ageing population, with a population of pensioners whose consumption needs place an abnormal demand on the shrinking proportion of potential workers? In this context, it seems that a low unemployment rate is a symptom of a serious problem, rather than a desirable state in an economically healthy society.
Thaomas
Dec 30 2018 at 3:27am
Agree with Scott’s list except the one about taxes. At lest recently ALL the discussion has tended to be about the incentive effects and very little about the income transfer effects.
Erik
Dec 30 2018 at 8:50am
So, for someone used to read widely for allmenbildnung and know enough that the superficial reading would be a breeze, what are the Hamlets? What texts would you recommend for richness of deeper reading?
Scott Sumner
Dec 31 2018 at 2:04pm
Thanks Mario, sounds interesting.
Ben, I’m not sure what point you are making. Are you saying that these sorts of anecdotes are useful, or useless?
Erik, Good texts like Mankiw, Cowen/Tabarrok, etc., are worth re-reading.
Eric Schoenberg
Dec 31 2018 at 4:39pm
As a psychologist who has taught behavioral economics, I’d suggest this paper offers a good reason why the alternative viewpoints it offers ought to be incorporated into introductory classes:
Ifcher, John, and Homa Zarghamee. “The Rapid Evolution of Homo Economicus: Brief Exposure to Neoclassical Assumptions Increases Self-Interested Behavior.” Journal of Behavioral and Experimental Economics (2018).
Michael Sandifer
Jan 3 2019 at 1:12am
Eric,
Perhaps a bit of time should be spent on behavioral economics in intro to microecomics, but it really has little or nothing to do with macroeconomics. And when it comes to microeconomics, a good bit of it focuses on how agents should behave, given simplified condtions, and a good bit of that focuses on firms rather than individuals. It has its place, but isn’t worth much more than a mention here and there in an intro class.
Ignazio Ziano
Jan 1 2019 at 10:23am
There are several things in this article that are either debatable (the bit about the easy money and that conventional econ could have predicted the GR-why didn’t it do it then? ) or false (war on drugs supported by behavioral economics). This second bit is particularly egregious – War on Drugs started in the 70s when BE was just getting afoot (eg prospect theory Econometrica – maybe the first thing economists took seriously – by Tversky and Kahneman came out in 1979, well after WOD was in full swing and well before it could affect policy). In fact WOD is based on Becker’s analysis of criminal behavior -a purely theoretical argument that if costs of acquiring and dealing drugs would surpass the benefits, people would stop doing it. Therefore, criminalizing drug use would make the whole problem disappear, exactly BECAUSE people are ‘rational agents’ with ‘utility functions’ and if faced with enough jail time they would stop doing crack, since they could easily compare the positive utility of a hit to the negative utility of jail time.
Interestingly, after trumpeting his theory of the ‘criminal as a rational agent’ for forty something years, Becker walked it back right before he passed away (
https://www.nber.org/papers/w10976).
Note how the 2013 paper makes a macro argument (‘demand is inelastic’) while the original 1968 paper makes a micro argument (‘criminals are rational’)- in this way, he avoids contradicting the ‘as-if’ model of Friedman, the original culprit of the rational agent theory and the foundation of his analysis of criminal behavior. All in all, this is paradigmatic of the failure of economics in: a) building useful models of economic agents (because of the ‘as-if’ assumption of ‘rational’ behavior); b) giving macro advice based on micro foundations (which are wrong).
Francisco Navarro
Jan 3 2019 at 4:31pm
I majored in economics because I was fascinated by how it could explain behavior. i always had difficulty with some of the key concepts – present value, comparative advantage, etc. A great older book for teaching these concepts is The Economic Way of Thinking by Paul Heyne.
Unlearning
Jan 4 2019 at 7:05am
I don’t see how this is different to saying “if you say gravity causes things to fall to earth, people will nod their heads”. Some truths are intuitive and in line with reality but others aren’t. It doesn’t speak to whether or not you should teach them, or how much time you should spend on them. If behavioural economics is empirically accurate and yields useful insights, it should be taught. Ditto for standard economics. That students think the former makes more sense is just a bonus for behavioural economists like myself.
All the people asking about what behavioural economics has done for them need to check the multitude of review articles: Camerer (2000); Barberis (2013); DellaVigna (2009); Shleifer (2012). There are certainly decent critiques: personally I don’t think ‘mainstream’ behavioural goes far enough and I prefer some of the work done by psychologists such as Gigerenzer or Neil Stewart on decision making. But this whole thread is just weird. As Ignazio said above, suggesting behavioural economics implies the war on drugs is so absurd I’m not sure where to start.
Aaron Cuevas
Jan 7 2019 at 2:02pm
Behavioral economics is more suited for bussines classess. “One time consumer behavior” issues.
Maybe in the small portion of determinants of demand. Nothing more really.
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