Behavioural economics and public policy

Tim Harford, 03/21/14

The past decade has been a triumph for behavioural economics, the fashionable cross-breed of psychology and economics. First there was the award in 2002 of the Nobel Memorial Prize in economics to a psychologist, Daniel Kahneman – the man who did as much as anything to create the field of behavioural economics. Bestselling books were launched, most notably by Kahneman himself (Thinking, Fast and Slow , 2011) and by his friend Richard Thaler, co-author of Nudge (2008). Behavioural economics seems far sexier than the ordinary sort, too: when last year’s Nobel was shared three ways, it was the behavioural economist Robert Shiller who grabbed all the headlines.

Behavioural economics is one of the hottest ideas in public policy. The UK government’s Behavioural Insights Team (BIT) uses the discipline to craft better policies, and in February was part-privatised with a mission to advise governments around the world. The White House announced its own behavioural insights team last summer.

So popular is the field that behavioural economics is now often misapplied as a catch-all term to refer to almost anything that’s cool in popular social science, from the storycraft of Malcolm Gladwell, author of The Tipping Point (2000), to the empirical investigations of Steven Levitt, co-author of Freakonomics (2005).

Yet, as with any success story, the backlash has begun. Critics argue that the field is overhyped, trivial, unreliable, a smokescreen for bad policy, an intellectual dead-end – or possibly all of the above. Is behavioural economics doomed to reflect the limitations of its intellectual parents, psychology and economics? Or can it build on their strengths and offer a powerful set of tools for policy makers and academics alike?

A recent experiment designed by BIT highlights both the opportunity and the limitations of the new discipline. The trial was designed to encourage people to sign up for the Organ Donor Register. It was huge; more than a million people using the Driver and Vehicle Licensing Agency website were shown a webpage inviting them to become an organ donor. One of eight different messages was displayed at random. One was minimalist, another spoke of the number of people who die while awaiting donations, yet another appealed to the idea of reciprocity – if you needed an organ, wouldn’t you want someone to donate an organ to you?

BIT devoted particular attention to an idea called “social proof”, made famous 30 years ago by psychologist Robert Cialdini’s book Influence. While one might be tempted to say, “Too few people are donating their organs, we desperately need your help to change that”, the theory of social proof says that’s precisely the wrong thing to do. Instead, the persuasive message will suggest: “Every day, thousands of people sign up to be donors, please join them.” Social proof describes our tendency to run with the herd; why else are books marketed as “bestsellers”?

Expecting social proof to be effective, the BIT trial used three different variants of a social proof message, one with a logo, one with a photo of smiling people, and one unadorned. None of these approaches was as successful as the best alternatives at persuading people to sign up as donors. The message with the photograph – for which the teams had high hopes – was a flop, proving worse than no attempt at persuasion at all.

Three points should be made here. The first is that this is exactly why running trials is an excellent idea: had the rival approaches not been tested with an experiment, it would have been easy for well-meaning civil servants acting on authoritative advice to have done serious harm. The trial was inexpensive, and now that the most persuasive message is in use (“If you needed an organ transplant, would you have one? If so, please help others”), roughly 100,000 additional people can be expected to sign up for the donor register each year.

The second point is that there is something unnerving about a discipline in which our discoveries about the past do not easily generalise to the future. Social proof is a widely accepted idea in psychology but, as the donor experiment shows, it does not always apply and it can be hard to predict when or why.

This patchwork of sometimes-fragile psychological results hardly invalidates the whole field but complicates the business of making practical policy. There is a sense that behavioural economics is just regular economics plus common sense – but since psychology isn’t mere common sense either, applying psychological lessons to economics is not a simple task.

The third point is that the organ donor experiment has little or nothing to do with behavioural economics, strictly defined. “The Behavioural Insights Team is widely perceived as doing behavioural economics,” says Daniel Kahneman. “They are actually doing social psychology.”

The line between behavioural economics and psychology can get a little blurred. Behavioural economics is based on the traditional “neoclassical” model of human behaviour used by economists. This essentially mathematical model says human decisions can usefully be modelled as though our choices were the outcome of solving differential equations. Add psychology into the mix – for example, Kahneman’s insight (with the late Amos Tversky) that we treat the possibility of a loss differently from the way we treat the possibility of a gain – and the task of the behavioural economist is to incorporate such ideas without losing the mathematically-solvable nature of the model.

Why bother with the maths? Consider the example of, say, improving energy efficiency. A psychologist might point out that consumers are impatient, poorly-informed and easily swayed by what their neighbours are doing. It’s the job of the behavioural economist to work out how energy markets might work under such conditions, and what effects we might expect if we introduced policies such as a tax on domestic heating or a subsidy for insulation.

It’s this desire to throw out the hyper-rational bathwater yet keep the mathematically tractable baby that leads to difficult compromises, and not everyone is happy. Economic traditionalists argue that behavioural economics is now hopelessly patched-together; some psychologists claim it’s still attempting to be too systematic.

Nick Chater, a psychologist at Warwick Business School and an adviser to the BIT, is a sympathetic critic of the behavioural economics approach. “The brain is the most rational thing in the universe”, he says, “but the way it solves problems is ad hoc and very local.” That suggests that attempts to formulate general laws of human behaviour may never be more than a rough guide to policy.

This shift to radical incrementalism is so much more important than some of the grand proposals out there

The most well-known critique of behavioural economics comes from a psychologist, Gerd Gigerenzer of the Max Planck Institute for Human Development. Gigerenzer argues that it is pointless to keep adding frills to a mathematical account of human behaviour that, in the end, has nothing to do with real cognitive processes.

I put this critique to David Laibson, a behavioural economist at Harvard University. He concedes that Gigerenzer has a point but adds:

“Gerd’s models of heuristic decision-making are great in the specific domains for which they are designed but they are not general models of behaviour.”

In other words, you’re not going to be able to use them to figure out how people should, or do, budget for Christmas or nurse their credit card limit through a spell of joblessness.

Richard Thaler of the University of Chicago, who with Kahneman and Tversky is the founding father of behavioural economics, agrees. To discard the basic neoclassical framework of economics means “throwing away a lot of stuff that’s useful”.

For some economists, though, behavioural economics has already conceded too much to the patchwork of psychology. David K Levine, an economist at Washington University in St Louis, and author of Is Behavioral Economics Doomed? (2012), says: “There is a tendency to propose some new theory to explain each new fact. The world doesn’t need a thousand different theories to explain a thousand different facts. At some point there needs to be a discipline of trying to explain many facts with one theory.”

The challenge for behavioural economics is to elaborate on the neoclassical model to deliver psychological realism without collapsing into a mess of special cases. Some say that the most successful special case comes from Harvard’s David Laibson. It is a mathematical tweak designed to represent the particular brand of short-termism that leads us to sign up for the gym yet somehow never quite get around to exercising. It’s called “hyperbolic discounting”, a name that refers to a mathematical curve, and which says much about the way behavioural economists represent human psychology.

The question is, how many special cases can behavioural economics sustain before it becomes arbitrary and unwieldy? Not more than one or two at a time, says Kahneman.

“You might be able to do it with two but certainly not with many factors.”

Like Kahneman, Thaler believes that a small number of made-for-purpose behavioural economics models have proved their worth already. He argues that trying to unify every psychological idea in a single model is pointless.

“I’ve always said that if you want one unifying theory of economic behaviour, you won’t do better than the neoclassical model, which is not particularly good at describing actual decision making.”

Meanwhile, the policy wonks plug away at the rather different challenge of running rigorous experiments with public policy. There is something faintly unsatisfying about how these policy trials have often confirmed what should have been obvious. One trial, for example, showed that text message reminders increase the proportion of people who pay legal fines. This saves everyone the trouble of calling in the bailiffs. Other trials have shown that clearly-written letters with bullet-point summaries provoke higher response rates.

None of this requires the sophistication of a mathematical model of hyperbolic discounting or loss aversion. It is obvious stuff. Unfortunately it is obvious stuff that is often neglected by the civil service. It is hard to object to inexpensive trials that demonstrate a better way. Nick Chater calls the idea “a complete no-brainer”, while Kahneman says “you can get modest gains at essentially zero cost”.

David Halpern, a Downing Street adviser under Tony Blair, was appointed by the UK coalition government in 2010 to establish the BIT. He says that the idea of running randomised trials in government has now picked up steam. The Financial Conduct Authority has also used randomisation to develop more effective letters to people who may have been missold financial products. “This shift to radical incrementalism is so much more important than some of the grand proposals out there,” says Halpern.

Not everyone agrees. In 2010, behavioural economists George Loewenstein and Peter Ubel wrote in The New York Times that “behavioural economics is being used as a political expedient, allowing policy makers to avoid painful but more effective solutions rooted in traditional economics.”

For example, in May 2010, just before David Cameron came to power, he sang the praises of behavioural economics in a TED talk. “The best way to get someone to cut their electricity bill,” he said, “is to show them their own spending, to show them what their neighbours are spending, and then show what an energy-conscious neighbour is spending.”

But Cameron was mistaken. The single best way to promote energy efficiency is, almost certainly, to raise the price of energy. A carbon tax would be even better, because it not only encourages people to save energy but to switch to lower-carbon sources of energy. The appeal of a behavioural approach is not that it is more effective but that it is less unpopular.

Thaler points to the experience of Cass Sunstein, his Nudge co-author, who spent four years as regulatory tsar in the Obama White House. “Cass wanted a tax on petrol but he couldn’t get one, so he pushed for higher fuel economy standards. We all know that’s not as efficient as raising the tax on petrol – but that would be lucky to get a single positive vote in Congress.”

Should we be trying for something more ambitious than behavioural economics? “I don’t know if we know enough yet to be more ambitious,” says Kahneman, “But the knowledge that currently exists in psychology is being put to very good use.”

Small steps have taken behavioural economics a long way, says Laibson, citing savings policy in the US. “Every dimension of that environment is now behaviourally tweaked.” The UK has followed suit, with the new auto-enrolment pensions, directly inspired by Thaler’s work.

Laibson says behavioural economics has only just begun to extend its influence over public policy. “The glass is only five per cent full but there’s no reason to believe the glass isn’t going to completely fill up.”

Why Max Weber Was Wrong          

The association of Protestantism with capitalism, famously articulated by Max Weber and now widely accepted by many, is theologically dubious, empirically disprovable, and largely incidental. An edited excerpt from Gregg's new book, Tea Party Catholic.      

Samuel Gregg, 12/11/13

Max Weber is justly famous for many things, but especially for having developed a theory about the relationship between capitalism and religion. The influence of The Protestant Ethic and the Spirit of Capitalism remains considerable, not least because it has become a staple of sociological literature on the subject.

Based on lectures he gave during a visit to America in 1904, Weber’s Protestant Ethic maintained that capitalism’s nature had to be understood as more than just producing and exchanging goods in a particular way (e.g., free exchange) within a particular institutional setting (limited government, etc.). At its heart, Weber insisted, capitalism was a state of mind: an outlook that involved, among other things, the subordination of emotion, custom, tradition, folklore, and myth to the workings of instrumental reason.

The real controversy begins with Weber’s argument that the decisive linkage of this form of rationality with economic practices occurred primarily in Europe’s predominantly Protestant areas. He was particularly thinking of countries such as England and the Netherlands, which were home to large numbers of Puritans and Calvinists, many of whom migrated to North America in the seventeenth century. These forms of Protestantism, Weber posited, ingrained the belief among their adherents that they should avoid superficial hobbies, games, and entertainment. Instead, Christians should commit themselves totally to whatever calling to which God had summoned them. Weber believed that these forms of Protestantism, especially their central doctrine of predestination, helped to foster the type of focused minds and disciplined work habits that are essential for market economies.

According to Weber, these ascetic Protestants didn’t believe it was possible to do good works to attain heaven in the next world. Either you were among the elect, or you weren’t. Weber interpreted Calvin as suggesting that one indication of election was the acquisition of wealth. It followed -- or so Weber’s theory went -- that the accumulation of wealth encouraged people to see themselves as destined to be saved. This, in turn, fostered a spirit that encouraged believers to grow ever-greater amounts of wealth.

On the surface, Weber’s proposition makes considerable sense. After all, many culturally Catholic countries such as Portugal and Spain -- not to mention almost all Latin American nations -- have lagged behind other Western nations in terms of economic development. More careful analysis of Weber’s claims, however, soon reveals them as less-than-adequate.

The accuracy, for instance, of Weber’s interpretation of Calvinist theology is open to question. The Westminster Confession -- the profession of faith that dominated Calvinist and Presbyterian theology from the sixteenth century onward, and on which Weber drew in developing his ideas -- indicates that the notion of “calling” in Puritan and Calvinist thinking is difficult to reconcile with the meaning given to it by Weber. The Confession clearly distinguishes between each person’s worldly vocation and his ultimate calling. Moreover, the earthly calling of each individual is not considered to constitute a positive or negative contribution to that person’s salvation.

The Westminster Confession also stresses that believers must ensure that their earthly vocation does not distract them from pursuing their heavenly calling. Weber, by contrast, seems to conflate the two. And on the subject of vocation itself, the Confession insists that Christians follow that calling in which they would be most serviceable to God rather than that which brought them “the most honor” in the world. Nothing in the text suggests any particular emphasis on commerce, let alone the idea that acquiring material wealth was somehow a sign of being among the elect.

Second, the empirical evidence disproving Weber’s connection between Protestantism and the emergence of capitalism is considerable. Even Catholic critics of modern capitalism have had to concede that “the commercial spirit” preceded the Reformation by at least two hundred years. From the eleventh century onward, the words Deus enim et proficuum (“For God and Profit”) began to appear in the ledgers of Italian and Flemish merchants. This was not a medieval version of some type of prosperity gospel. Rather, it symbolized just how naturally intertwined were the realms of faith and commerce throughout the world of medieval Europe. The pursuit of profit, trade, and commercial success dominated the life of the city-states of medieval and Renaissance Northern Italy and the towns of Flanders, not to mention the Venetian republic that exerted tremendous influence on merchant activity throughout the Mediterranean long before 1517.

Since Weber’s time, much scholarly work has been done to illustrate the advanced state of market-driven economic development in the Middle Ages. Throughout the 1940s and 1950s, the Belgian scholar Raymond de Roover penned numerous articles illustrating that, during the Middle Ages, financial transactions and banking started to take on the degree of sophistication that is commonplace today. Likewise, The Commercial Revolution of the Middle Ages, by the Italian-American historian of medieval European economic history, the late Robert S. Lopez, shattered the historical claims that formed much of the background of Weber’s argument. Lopez demonstrated in great detail the way in which the Middle Ages “created the indispensable material and moral conditions for a thousand years of virtually uninterrupted growth.”

In recent decades, the historians Edwin Hunt and James Murray have illustrated just how much the medieval period was characterized by remarkable innovation in methods of business organization. They also suggest that the advent of modernity actually heralded the expansion of state economic intervention and regulation in an effort to constrain economic freedom. In a similar fashion, the sociologist Rodney Stark has gathered together disparate sources of historical and economic analysis to illustrate the origins of capitalism and major breakthroughs in the theory and practice of wealth creation in the medieval period. Central to Stark’s analysis is his highlighting of the way pre-Reformation Western Christianity saw the world as one in which humans were called upon to use their reason and innate creativity to develop its resources -- including economically.

Here one could add that, before Adam Smith, some of the most elaborate thinking about the nature of contracts, free markets, interest, wages, and banking that developed after the Reformation was articulated in the writings of Spanish Catholic scholastic thinkers of the sixteenth and seventeenth centuries. Theologians such as Francisco de Vitoria OP, Martín de Azpilcueta, Juan de Mariana SJ, and Tomás de Mercado OP, anticipated many of the claims made by Smith two centuries later.

To be sure, much of this thinking occurred by way of side-effect rather than as a result of the systematic analysis undertaken by Smith. For as commercial relationships expanded throughout Europe in the centuries preceding and following the Reformation, there was a marked increase in the number of penitents asking their confessors for guidance about moral questions with a strong economic dimension.

What was the just price?

When was a person no longer obliged to adhere to a contract?

When was charging interest legitimate?

When did it become usurious?

As a result, priests looked to theologians for guidance on how to respond to their penitents’ questions. Thus, as Jürg Niehans stressed in his History of Economic Theory:

The scholastics thus found it necessary to descend from theology into the everyday world of economic reality, of early capitalism, foreign trade, monopoly, banking, foreign exchange and public finance. What one knew about these things in the School of Salamanca was hardly less than Adam Smith knew two hundred years later, and more than most students know today.

Even when we consider modern capitalism’s emergence, a direct connection between this event and Protestantism is very open to question. The economic historian Jacques Delacroix, for instance, has highlighted many facts about this period that Weber’s theory simply cannot account for. “Amsterdam’s wealth,” Delacroix writes, “was centered on Catholic families; the economically advanced German Rhineland is more Catholic than Protestant; all-Catholic Belgium was the second country to industrialize, ahead of a good half-dozen Protestant entities.”

A better explanation for why some parts of Europe lagged behind others is to be found in the influence of absolutism and mercantilism. To our ears, “absolutism” is a word that contains echoes of despotic government. Yet the age of absolutism, which lasted throughout most of Europe from about 1600 until 1800, was a rather different phenomenon. Drawing heavily on the Divine Right of Kings (a theological doctrine always disputed by the Catholic Church) for legitimacy, absolutism was also associated with the rise of the nation-state that began before the Reformation, but which accelerated after 1517.

Absolutism’s underlying motif was the conviction that centralizing state power was the path to stronger and wealthier societies. In terms of commercial life, absolutism manifested itself in countries such as Lutheran Prussia, Catholic France, and Orthodox Russia in the form of ever-increasing restrictions on economic freedom. Governments began assuming more top-down direction of economic activity through subsidizing exports, imposing tariffs on imports, and mandating government monopolies of particular trade or products that were then sold or leased to groups of merchants. Adam Smith famously called this set of economic arrangements the mercantile system.

It is difficult to downplay mercantilism’s effect on modern economic development. From the Age of Discovery to the late nineteenth century (and in many cases beyond), Catholic Latin America was largely dominated by an absolutist, mercantilist economic culture. Therein, Stark contends, lie some of the fundamental causes of Latin America’s slower economic development as compared to the United States. Even the dominant eighteenth-century Protestant power, Britain, engaged in mercantilist economic practices despite having rejected a drift toward absolutism in the previous century. And as every student of the American Revolution knows, Britain’s mercantilist economic policies contributed mightily to the outbreak of the War of Independence.

Much more could be said about these historical observations. The point, however, is that the widespread association of one form of Protestantism with capitalism is theologically dubious, empirically disprovable, and largely incidental. To make these observations is not to propose that modern capitalism was somehow constructed upon a “Catholic ethic.” That would be equally false. It is simply to note that much of Weber’s particular analysis is very questionable and that this should be acknowledged by economists, historians, and above all, by Catholics. How ironic it would be if the last people to believe in Weber’s Protestant ethic thesis were Catholics!

Samuel Gregg is Research Director at the Acton Institute. He has authored several books, including Becoming Europe: Economic Decline, Culture, and How America Can Avoid a European Future and most recently Tea Party Catholic: The Catholic Case for Limited Government, a Free Economy, and Human Flourishing.

http://www.thepublicdiscourse.com/2013/12/11099/

請參考本欄J. Bowyer 教授大作《宗教是經濟成長的主要動力之一?》(Is Religion An Essential Driver Of Economic Growth?, 06/09/13)以及我的一篇回應《宗教和經濟成長真的相關?》。Gregg教授可說簡明扼要的批駁了韋伯「新教倫理觀」孕育或助長「資本主義精神」的觀點。 -- 卜凱

在「社會學」以及「知識社會學」和「社會建構論」上，我頗受韋伯和柏格的影響。但我對這篇報導中兩者對「宗教」和「經濟成長」相關的看法並不以為然。此處略表己見，以後有機會再申論。

Is Religion An Essential Driver Of Economic Growth?

Jerry Bowyer, 05/29/13

Peter Berger is perhaps the world’s most prominent living sociologist. He has written two dozen books including seminal texts in the development of the sociology of religion, the sociology of knowledge, and the sociology of modern development. He may be the most qualified person to speak with authority on matters pertaining to the relationship between religious beliefs and economic development, so I decided to ask him to explain this to me.  This interview is the result, and it’s worth listening to in full. At age 84 Berger is still sharp as a tack and has a long lifetime of study and analysis behind him (and I expect quite a number ahead of him).

When I asked him what he has learned in a lifetime of studying these questions, he told me that there are certain social preconditions to economic development, and that the way a society operates is important in regards to how prosperous that society can become. This is largely a matter of culture, and for most of the world culture basically means religion. Religion drives culture; culture drives social forms; social forms drive development.

Regarding different religions and their level of conduciveness to growth, he said that they are not equally conducive. He pointed out the work of Max Weber, whose seminal work, The Protestant Ethic and the Spirit of Capitalism, argued that the lifestyle which arose from Protestantism played a decisive role in the creation of modern prosperity. For Weber, and Berger agrees, the Calvinistic lifestyle of worldly asceticism became a source of growth and capital accumulation. Worldly asceticism (Weber’s phrase) upheld the virtue of productive labor in this world, as opposed to an otherworldly orientation often associated with medieval Catholicism. The focus on this life as opposed to the afterlife tends to create large income streams. But worldly asceticism looks askance at lives of excessive spending and conspicuous consumption, which are often associated with wealth. The result is a well-educated, highly skilled diligent work force and large pools of capital. Without this, or something like it, modern capitalism would not have arisen as it did.

Not all religions, at least in the current form, have these same characteristics, therefore not all religions are equally conducive to development. Not surprisingly, Berger says he has been accused of racism or bias because of these views. But he points out that it’s not a matter of bias; it’s simply a matter of facing the facts.

According to him, this Protestant effect expressed itself in different ways in different times and places: historically in America in her Puritan heritage. Currently in the developing world, it reveals itself in the explosive growth of Evangelicalism which is helping to create modern developed economies. Perhaps Pentecostalism plays a role in the Third World similar to that played by Calvinism in Europe and North America, or at least is an important factor in the emergence of a middle class.

There is an important caveat in all this: Religions change over time and so it’s not helpful to do this sort of analysis in terms of the characteristics of a religion in general, but instead in a certain historical context. For example, Christianity in the Middle Ages may well have retarded economic progress through its embrace of usury laws (which I would argue it got from Aristotle rather than from Christ.)

Another caveat urges us to avoid confusing the effects of a religion on institutions with its effects on individuals. According to Berger, Confucianism preaches many of the virtues, such as education, hard work and delayed gratification, which are conducive to prosperity among individuals, but that Confucian disdain for commerce has tended to create societies which are more conducive to entrepreneurial stagnation. Therefore a Confucian China can stagnate for millennia. But when Chinese people migrate to more open societies in Southeast Asia, they become the wealthy ‘overseas Chinese,’ Jews of the East, prospering and helping to prosper the societies they live in, part of the vanguard of economic development. Groups like the overseas Chinese become easy scapegoats for demagogues.

Regarding Islam, Berger does not discount the possibility that it might be able to coexist with liberty and prosperity, but points out that historically the subservient role of women in Muslim nations is a source of economic drag. To isolate half of the talent of a population from productive activity is bad enough. But to add to that a pattern of leaving women uneducated makes things even worse because of the role that mothers play in the intellectual development of children. He points to Turkey as a beacon of hope. I am less optimistic than Berger about the much vaunted ‘Turkish model,’ but time will tell.

Islamic economics is a subject unto itself and deserves at least one future column of its own. But in case you’re not quite ready for that topic yet, I’d suggest that you listen to my interview with Peter Berger.  Because when it comes to talking about religious differences, there is a policeman in your head who twirls his night stick every time you question the current dictates of our pervasive political correctness speech code, and Peter Berger might help you put that policeman into a helpful retirement.

http://www.forbes.com/sites/jerrybowyer/2013/05/29/is-religion-an-essential-driver-of-economic-growth/