Turning Behavioral Economics Around
Consider the case of behavioral economics. One of the observed patterns is a status quo bias—a tendency to over weight potential losses relative to potential gains. I am not sure if it has occurred to any of those arguing for behavioral economics that two of the most striking examples of that pattern are the precautionary principle and the campaign to slow or prevent global warming.
The essence of the precautionary principle is that one ought not to do anything—build nuclear reactors, say, or create genetically engineered crops—unless all possibility of very bad results can be eliminated. The principle does not permit balancing some risk of very bad results from doing something against a risk of very bad results from not doing it. Still less does it prescribe always doing something unless one can show that there is no chance that failing to do it will have very bad results. Hence it makes sense only if bad effects from change are weighted much more highly than good.
Or consider the widely held view that global warming on the scale suggested by the IPCC reports—a few degrees C over about a century—would obviously be a catastrophe. It cannot be based on the idea that humans cannot live with somewhat higher temperatures, since humans already exist, indeed prosper, across a much wider temperature range. It cannot be based on the idea that increased temperature is inherently bad, since there are obviously lots of places that would be better suited to human habitation if a little warmer, including most of Canada, Alaska and Siberia. The world was not, after all, designed for our benefit, so there is no reason to believe that current climate is optimal for us. There has been a good deal of talk about higher sea levels, but most of it ignores the fact that the increase suggested by the various IPCC models is only a foot or so—much less than the usual difference between high tide and low.
Rapid climate change is presumptively undesirable, since our present way of doing things—what crops we grow where, where our housing is located and how well it is insulated—is optimized to present conditions. But over a hundred years, farmers will change crops several times over, a large fraction of the housing stock will be replaced or modified, we will change what we are doing for lots of reasons unrelated to climate change. Hence it is hard to argue any strong presumption that climate change at the rates suggested by current models is bad.
Yet discussions of the subject almost always take it for granted that it is not merely bad but catastrophically bad, worth bearing very large present costs to prevent. A clear case of status quo bias.
For one final example, consider the case of Social Security. Behavioral economics provides an argument in favor of it. Individuals badly underweight costs and benefits in the distant future—so-called hyperbolic discounting. Hence they will be less willing than they should be to provide voluntarily for their old age. Hence the government must solve the problem via a program of forced saving.
The problem with the argument is that hyperbolic discounting, insofar as it is real, applies to voters and politicians as well as to people saving for their old age. Hence it is predictable that the force will be real but the saving will be imaginary—there are always politically profitable ways of spending money that happens to be lying around—leaving the system with a trust fund full of IOU's.
Readers are invited to contribute other examples, other situations where behavioral economics provides arguments against the sort of things that most behavioral economists appear to be in favor of.