The Future of Behavioral Economics: A Conjecture
Most of the applications of the theory that I have seen concern decisions by individuals, employees, firms in the general area covered by price theory, more commonly and misleadingly labeled "microeconomics." My conjecture is that where behavioral economics will actually matter, if it matters, will be in disequilibrium theory, more commonly labeled "macroeconomics."
Price theory is a reasonably well understood structure of ideas that works reasonably well. Markets are observed to successfully solve the complicated coordination problem underlying any but the simplest economy; steel mills don't shut down because nobody is mining enough ore, or car companies because nobody is producing enough steel. Obvious predictions of the theory—surpluses when price is fixed above the market level, shortages when it is fixed below, increases in price when supply is restricted, market prices responding to (estimates of) future as well as present supply and demand—are routinely observed. The theory is not, of course, a perfect description of reality, and behavioral economics might improve it a little. But, at the fundamental level, there is no need to fix something that isn't broken.
Disequilibrium theory, the theory that is supposed to explain business cycles, involuntary unemployment, and similar observed phenomena, is much more of a problem. If you simply take the tools of price theory and turn the crank, you get clear answers to the relevant questions. The price of labor equates supply and demand on the labor market as on other markets, so there is no involuntary unemployment, save when minimum wage laws prevent wages from moving to their equilibrium level. Firms and employees make their decisions taking account of rational predictions of future as well as present conditions, so there is no business cycle. The analysis is straightforward. And the conclusions are wrong.
There have been a variety of attempts to solve this problem over the past century or so. Fifty years back, the Keynesian version of macroeconomics was pretty general accepted. It turned out that it too gave incorrect predictions, and academic economists largely abandoned it, although it retained its popularity with journalists, politicians, and much of the general public and was revived with great confidence in response to recent problems. A variety of other attempts to solve these problems have been made. So far as I can tell—it is not my field, so I am judging as an observer, not a participant—none of them has combined a clear, convincing analysis with a correct prediction of real world observations.
If the rational model gives, for this set of questions, the wrong answer, perhaps the solution is a model that incorporates irrational behavior. That is what behavioral economics attempts to provide. If it succeeds, that will be an important contribution to economic theory, a much more important contribution than a collection of observations about particular mistakes made by individual economic actors.