Freakonomics Podcast: The Maddest Men of All. Episode about Behavioral Economics

Another interesting discussion on the field of behavioral economics (see a previous post on the topic). Some really interesting discussions on this podcast about the contrast between classical economics and behavioral economics. You get some insight into the different approaches to knowledge and assumptions between two related fields in the human sciences.

You also get some interesting insights about how we make decisions. To what degree are our decisions motivated by reason? And to what degree are they motivated by emotion? Is it ethical for someone to use their knowledge of our emotional decision making to push us to make a decision they want us to make (i.e. buy something we otherwise wouldn’t)?

“Let’s take an example where you go to an airline website and it … quotes you a price for your seat to Sacramento, whatever it may be, and it says only four seats left at that price. Now, that works on me. I’ve spent eight years studying this stuff, I know it’s an attempt to exploit my scarcity bias, but it still makes me click. That’s just the way I’m wired. Now implicit in that line is that subsequent seats will be more expensive. But actually the person in their weasel wording hasn’t exactly made that promise, have they? They’ve merely said at this price. At this price is not quite clear. It could be that the subsequent four seats are being sold actually at a lower price.”

Ethics of behavioral economics: Nudges or manipulation?

The field of behavior economics includes the study of how and why people make the decisions they do and consequently, it’s the study of how to change people’s decisions to push them in different directions. Governments have used these techniques and findings to promote positive behaviors like not littering and not smoking but also to increase the number of people paying their taxes. Private companies have used these techniques to increase the sales of their products and services. People employing these techniques often say they provide a “nudge.” At what point do these nudges become manipulation? Does it matter if the behavior being promoted is one we agree is positive like quitting smoking? How does the use of language affect our perception of ideas and things?

What is also interesting about this field is that some traditional economists resent the term “behavioral economics” and don’t consider it to be part of their field. They were further annoyed when a behavioral economist and self identified psychologist, Daniel Kahneman, won the Nobel Prize for economics.

Below are a couple of articles about this field.

1. Manipulate Me: The Booming Business in Behavioral Finance

“Many behavioral interventions work, whether at reducing litter and power usage or boosting savings rates and organ donations. Yet these successes aren’t the whole story. Even after rigorous experimentation and data analysis, the best-intentioned nudges can fall flat or backfire. Some may be behavioral band-aids that don’t address deeper structural problems such as stagnating wages. Nevertheless, consumers have jumped on the bandwagon, eager to be manipulated into the best version of themselves, and businesses are rushing to meet the demand.”

2. What was I thinking?

The latest reasoning about our irrational ways

“Why do people do things like this? From the perspective of neoclassical economics, self-punishing decisions are difficult to explain. Rational calculators are supposed to consider their options, then pick the one that maximizes the benefit to them. Yet actual economic life, as opposed to the theoretical version, is full of miscalculations, from the gallon jar of mayonnaise purchased at spectacular savings to the billions of dollars Americans will spend this year to service their credit-card debt. The real mystery, it could be argued, isn’t why we make so many poor economic choices but why we persist in accepting economic theory.”

3. Why Behavioral Economics Is Cool, and I’m Not

“It happens to me regularly: I’m an organizational psychologist, but I get introduced at least once a week as a behavioral economist. The first time this happened before a speech, I attempted to set the record straight, telling the executive that all of my degrees were in psychology. His response: ‘Your work sounds cooler if I call you a behavioral economist.'”

Room for Debate: Are Economists Overrated?

“One in 100 articles in The New York Times over the past few years have used the term ‘economist,’ a much greater rate than other academic professions, according to a recent article in The Upshot. Economic analysis and pronouncements are crucial to most policy decisions and debates.

But given the profession’s poor track record in forecasting and planning, and the continued struggles of many Americans, have we given economists too much authority?”

David Suzuki needs an economics refresher course

“Beyond tarring the economics profession, he displays a perplexing lack of understanding of basic economic concepts. First of all, none of the rules taught in undergraduate economics course advise the owner of a resource to deplete it as quickly as possible. Perhaps he was confused with the Tragedy of the Commons problem, where lack of private ownership causes a resource to be overused.”

Economics Does Not Lie: The dismal science is at last a science—and the world is the beneficiary.

“Behind all this unprecedented growth is not only the collapse of state socialism but also a scientific revolution in economics, as yet dimly understood by the public but increasingly embraced by policymakers around the globe. The revolution began during the sixties and has finally brought economists to a broad, well-founded consensus about what constitutes good policy. No longer does economics lie; no longer would Baudelaire be able to write that “economics is a horror.” For the mass of mankind, on the contrary, it has become a source of hope.”