Tuesday, December 07, 2010

Turning Behavioral Economics Around

I am currently involved, elsewhere online, in a discussion of behavioral economics. One point it raises is that arguments from behavioral economics—observed patterns of irrational behavior—tend to be used to support positions that those using them already believe in. Much the same is true of arguments from market failure. As I pointed out some time ago in the course of an exchange with Robert Frank, the argument he was making had a perfectly straightforward implication—that instead of subsidizing schooling, at both high school and college levels, we should tax it. It was not a conclusion that he drew, or even acknowledged and responded to when I drew it.

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.


At 4:50 PM, December 07, 2010, Blogger jimbino said...

You properly remind us that, in 100 years of gradual global warming, humans can adapt, farmers can change crops, houses will fall apart anyway. But what you fail to note is that none of us worrying about the problem will be alive 100 years from now.

So why is it a problem? Only because the breeders want us to sacrifice now to secure the future of their brood, all while we're paying $17,000 per year per NY kid who scores in math/science far below his peers in Shanghai after only 9 months of mis-education per year.

When the polluting humans disappear, the other species of the world will rejoice. We should stop TNR with cats and apply it to Algore and his ilk.

At 7:16 PM, December 07, 2010, Blogger NCLu said...

Speaking as a breeder, I'm more worried about those that want to commandeer all economic resources to simulate a human-free world.

At 7:45 PM, December 07, 2010, Anonymous Anonymous said...

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.

Bryan Caplan points out in "The Myth of the Rational Voter" that economists are more libertarian than the general public. Here you give examples in which behavioral economists support interventionist policies, contrary to the internal logic of their field of study, and end it by asking us if we know of similar logical fallacies.

Do you believe that behavioral economists are especially prone to an interventionist (statist) bias? Perhaps I am reading too much into your words, but that was the impression I got. If the answer is yes, they do have this specific bias, does the rest of the economics profession suffer from it? Or only behaviorial economists?

I'm trying to square your interpretation of behavioral economists with what I know from surveys of economists. Maybe it is the case that economists are not as free of bias as you'd like, but are less biased than the average person. Would that be a fair assessment of your views?

At 9:06 PM, December 07, 2010, Blogger jdgalt said...

If that's how the Precautionary Principle works, I see a parallel to Jewish law (which says in part that a judge needs, more or less, "clear and convincing evidence" to make an accused thief pay back the victim, but if the evidence closer to 50/50 and the victim has already taken his money back, he can keep it).

Under either system, unauthorized preemptive action pays. Which may not be the incentive that the rule's authors intended to create.

At 9:12 PM, December 07, 2010, Anonymous Josh W. said...

Bryan Caplan and Scott Beaulier have a good paper on the implications of behavioral economics on welfare policy. If the poor are systematically biased, welfare can hurt them.

"Behavioral Economics and Perverse Effects of the Welfare State"


At 1:43 PM, December 08, 2010, Anonymous RKN said...

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

If human habitation means "quality of human life", it is certainly arguable that higher temperatures in Alaska, for instance, would improve the quality of life. Or Canada for that matter. I would expect a wide variability of opinion on that, reflecting the wide diversity of lifestyles we have up here.

And of course someone could easily co-opt this kind of argument and claim the opposite, that even slightly warmer temperatures would make many places in the southern latitudes, places which are already oppressively hot much of the year, even worse in terms of quality of life.

At 2:20 PM, December 08, 2010, Blogger Glen Whitman said...

In our paper on slippery slopes and the new paternalism, Mario Rizzo and I argue at length (see especially Section V, starting on p. 723) that slippery slopes toward bad policy are especially likely when policymakers are subject to the same behavioral biases that citizens are. Our first example is hyperbolic discounting by policymakers leading to (even more) myopic policy choices.

At 9:38 PM, December 08, 2010, Anonymous js290 said...

Perhaps another example of status quo bias can be drawn from the supposed obesity epidemic. A lot of people seem to defer to the USDA food pyramid as a healthy way to eat but never consider if perhaps the foods advocated by those guidelines are indeed what's making us fat.

This reminds me of the Herman Melville quote: Of all the preposterous assumptions of humanity over humanity, nothing exceeds most of the criticisms made on the habits of the poor by the well-housed, well-warmed, and well-fed. Or, as my dad put it, "Why are rich people always telling poor people how to live?"

Also, it seems like in order for rational choice theory not to fall apart, all choices have to be rational. Irrational choices seem to be better described as misinformed choices. The person may be misinformed for various reasons and may value whatever information differently. But, ultimately, it seems like the choice made had to be a rational one.

At 5:30 AM, December 09, 2010, Anonymous paul b said...

over confident money managers sighting over confidence in investors as the way they add value to their portfolios. if there really are behavioral biases the money management industry is the best example...

At 11:09 AM, December 09, 2010, Anonymous GregS said...

Dan Ariely's book "Predictably Irrational" contains an example. (It is an otherwise excellent book.) He is talking about irrational consumer choice, using the example of a couch presented in a showroom to make it more attractive to the customer. He explicitly says that free-market theorists predicate their arguments on consumer rationality, and that the falsity of this condition means we may need some government intervention. I don't know what he has in mind for the couch example (he doesn't say). A price ceiling, perhaps? But one implication of his argument is that we ought to encourage people to buy things that they irrationally undervalue. Your irrationality may lead you to undervalue the couch, so you may require someone to force you to buy it when you otherwise wouldn't. I presume Ariely is only worried about the cases in which you overvalue the couch, so someone is needed to prevent you from buying it.

I see this kind of argument a lot from behavioral economists: (1) People do not really have rationally ordered preferences. (2) Therefore, free-market theories fail and we need an interventionist government to help us.
You need an intermediate step to truly make this argument: Governments are more capable than individuals of correcting for individual irrationality.
That statement is wildly implausible, which is perhaps why no one making the above argument has acknowledged it, let alone attempt to argue it's correctness. Even if I do behave irrationally when buying a couch, surely no one is in a better position than me to correct for that. The "Bureau of Consumer Rationality" probably doesn't know ANY of my preferences and receives no benefit from correcting them accurately; I at least know my preferences approximately and DO benefit if I order them correctly.

At 12:05 PM, December 14, 2010, Anonymous Clueless Libertarian said...

Agreed, maybe if the IPCC had some economists on its staff instead of a bunch of old stodgy scientists they might have a clue about these things!

At 10:30 PM, April 10, 2014, Anonymous Danni Catambay said...

I'm still struggling how your description of the downsides to global warming equate to a "clear" case of the status quo bias. All it sounds like to me is that you don't think global warming is all that bad, but over estimating the costs of non-action are not the same as preferring non-action...or preferring action, or whatever direction you are suggesting is the bias.


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