George Loewenstein gets real about behavioral economics

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Economic theory often informs public policy. So it’s no surprise that, in recent years, as pockets of economists have taken a cue from psychology and started to form models that assume human beings are not always rational, money-driven decision-makers, policymakers would notice. Last year Mike Grunwald wrote a lengthy story on the topic.

Yet George Loewenstein writes in today’s NYT that behavioral economics may not be fully ready for primetime after all. This is an interesting argument for Loewenstein to make since he is one of the original economists to go down the behavioral path. And it’s a path he’s still on, as a professor of economics and psychology at Carnegie Mellon University and researcher at the school’s Center for Behavioral Decision Research. The op-ed was co-authored by Peter Ubel, a doctor by training who has written a lot about how traditional economics doesn’t capture human nature and who runs a center at the University of Michigan that studies medical decision-making.

What do Loewenstein and Ubel find so wrong?

Basically, that policymakers try to use behavioral economics to solve problems which the approach wasn’t meant to address. Often, the pair write, applying old-fashioned monetary incentives is a much better solution than attempting to re-frame issues and thereby change the way people think. Take, for example, the obesity epidemic:

The fashionable response, based on the belief that better information can lead to better behavior, is to influence consumers through things like calorie labeling — for instance, there’s a mandate in the health care reform act requiring restaurant chains to post the number of calories in their dishes.

Calorie labeling is a good thing; dieters should know more about the foods they are eating. But studies of New York City’s attempt at calorie posting have found that it has had little impact on dieters’ choices.

What would be a better way to tackle obesity (should the government decide that’s something it wants to do)? Simply make unhealthy food more expensive, the two decide. Hit people in the pocketbook, just like classical economics says. When price goes up, demand comes down:

To combat the epidemic effectively, then, we need to change the relative price of healthful and unhealthful food — for example, we need to stop subsidizing corn, thereby raising the price of high fructose corn syrup used in sodas, and we also need to consider taxes on unhealthful foods.

Hm. Where have I heard that before?

Another example the authors give derives from studies that show people will use less electricity if they know their neighbors are doing the same. The behavioral insight at play: we are all conformists at heart. Loewenstein and Ubel quote one study that found showing people how much electricity they use compared to their neighbors, drives down consumption by 1% to 2.5%. But that’s a modest change compared to what a carbon tax could do, the two write, namely “instantly bring the price of energy into line with its true cost and would unleash the creative power of the marketplace to generate cleaner energy sources.”

In defense of the behavioral approach when it comes to energy use, there are other studies (PDF) that show a much greater change in consumer behavior.

Nonetheless, I agree with the overall point. Behavioral economics didn’t come about to replace traditional economics. The point was always to function as something of an add-on—as a way to fix traditional decision-making models at the particular points where they break down.

So how did it come to be that behavioral solutions are being turned to in place of classical ones? Loewenstein and Ubel point a finger at policymakers themselves, and the fact that the behavioral approach often lets them avoid making unpopular or difficult decisions. It’s easier to make restaurants post calorie counts than it is to take on the entire packaged food industry with a new tax tied to a product’s relative healthfulness.

Or consider, as Loewenstein and Ubel do, a bill in New York state intended to make drivers think more clearly about how much gas they’re using by requiring new cars to post gas mileage as “gallons-per-mile” instead of “miles-per-gallon.” The problem with that:

[M]ore and better information fails to get at the core of the problem: people drive large, energy-inefficient cars because gas is still relatively cheap. An increase in the gas tax that made the price of gas reflect its true costs would be a far more effective — though much more politically painful — way to reduce fuel consumption.

To get people to make big changes, the best mechanism is still price.