More Trouble for Behavioral Economics

Behavioral economics and its close cousin, neuroeconomics, have been all the rage in the last few decades. Behavioral economists claim to go beyond the naive assumptions of neoclassical economics by taking psychology (and neurophysiology) seriously, using laboratory experiments, brain scans, and other techniques to study how economic actors “really” behave under various circumstances. While some Austrians have embraced behavioral approaches, most have tended to dismiss the field, viewing behavioral economics as psychology, not economics. I find behavioral economics an ad hoc mixture of occasionally interesting psychological insights and naive policy recommendations that fit the authors’ particular ideological views (e.g., “soft paternalism”). More important, it’s hard to identify any important substantive contributions coming out of the behavioral literature; hardly anything seems both new and true. (Some neoclassical economists feel this way too.)

A recent NBER paper (gated, unfortunately) points to an important problem in the empirical literature on behavioral responses to stimuli. Economists Rajshri Jayaraman, Debraj Ray, and Francis de Vericourt studied an Indian tea plantation that changed its employment contract, from an output-based system with wages tied to individual performance to a “softer,” more equitable system with higher guaranteed minimum payments to all and weaker performance incentives. Initially, the plantation’s output increased, seemingly supporting the behavioralist claim that strong incentive plans make workers unhappy and lower productivity. However, after the first few months, this effect completely disappears, and worker behavior is entirely explained by a conventional economic model in which workers respond to financial incentives. As the authors put it, using more technical academic language: “an entirely standard model with no behavioral or dynamic features that we estimate off the pre-change data, fits the observations four months after the contract change remarkably well. While not an unequivocal indictment of the recent emphasis on ‘behavioral economics,’ the findings suggest that non-standard responses may be ephemeral, especially in employment contexts in which the baseline relationship is delineated by financial considerations in the first place.”

In my reading, the authors have found what used to be called a “Hawthorne effect,” a temporary response by employees to any change in management practice, workplace conditions, the employment contract, etc. Trying something new, whatever it is, can have a positive effect, but only temporarily.

I think the authors have identified a more fundamental problem with the behavioral social-science literature, namely that the empirical studies typically cover a very short time horizon, so that it is difficult to distinguish transitory from more permanent effects. Many behavioral researchers begin with strong prior beliefs about what they expect to find and, once they think they find it, they stop looking.

Comments

  1. Anyone interested in behavioral economics should read some of the books by Gary Klein. Instead of studying human behavior under laboratory conditions, Klein studies decisions made by people in their natural environments. For example, he interviews firefighters about how they made their decisions in fighting fires and neonatal nurses about how they made decisions about which babies were at high risk. What he’s found is that, in these circumstances, people actually make better decisions through the natural intuitive process than they would have been able to through a “rational” process.

    Klein’s books include “The Power of Intuition:How to Use Your Gut Feelings to Make Better Decisions at Work”, “Sources of Power: How People Make Decisions”, and “Streetlights and Shadows: Searching for the Keys to Adaptive Decision Making.”

  2. The biggest flaw with behavioral economics up to this point is its ad hoc nature. It is easy to say the assumptions of rationality are false. It is hard to say when they are false. Until then, I do not see what behavioral economics adds that neoclassical or subjectivist economics has not already said.

    • It’s even easier to say it when you are a supposed scientist involved in the pursuit of knowledge. These people are the sort who tend to regard behaviour of which they are in principle incapable of knowing the motives, as ‘irrational’, if it doesn’t agree with their assumptions.

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