Applying behaviorism to economics—and helping people stop acting against their own best interests
The Hidden Forces That Shape Our Decisions
By Dan Ariely;
Harper; 280pp; $25.95
Improving Decisions About
Health, Wealth, and Happiness
By Richard H. Thaler and Cass R. Sunstein
Yale University Press; 304pp; $25.95
Behavioral economics has hit the mainstream, and it's about time. Behavioralists are finally bringing the economics profession around to recognizing that real human beings don't act like the coldly rational, welfare-maximizing automatons of traditional textbooks. They are proving what those of us without the heavy burden of a PhD in economics already knew, which is that real people are impulsive, shortsighted, and procrastinating—95% Homer Simpson and only 5% Mr. Spock.
Economists aren't just sitting on this newfound wisdom. They're using it to design fixes for problems ranging from drug addiction to undersaving for retirement to the proper positioning of cookies vs. fruits in the cafeteria.
Two new books should help spread the word about behavioral economics to an even wider audience. Predictably Irrational: The Hidden Forces That Shape Our Decisions, by Dan Ariely, is an entertaining tour of the many ways people act against their best interests, drawing on Ariely's own ingeniously designed experiments. The soon-to-be-published Nudge: Improving Decisions About Health, Wealth, and Happiness, by Richard H. Thaler and Cass R. Sunstein, covers similar territory but with an emphasis on how society could reshape institutions to get people to do the right thing for themselves more often.
Ariely's book is the more personal and accessible, starting with his own poignant history. When he was an 18-year-old in the Israeli army, a magnesium-flare explosion left him with third-degree burns over 70% of his body. For the next three years, nurses would yank the bandages off and replace them with new ones daily. Ariely realized later that he and others would feel less pain if the bandages were removed slowly. But the nurses felt less psychic pain when they did it quickly.
Exploring the mental errors that led the nurses to cause their patients unnecessary suffering led Ariely, now a professor at Massachusetts Institute of Technology's Media Lab, to his life's work of teasing out the psychological origins of bad decisions. It's fun to watch him manipulate the subjects of his experiments into doing really dumb things, like abruptly switching to a cheaper brand of chocolate when its price is discounted trivially from one penny to the "irresistible" price of zero. Concludes Ariely: "We are pawns in a game whose forces we largely fail to comprehend."
Nudge, by University of Chicago colleagues Thaler and Sunstein, picks up where Ariely leaves off by focusing on what to do with all these insights into human nature. Thaler is the grand old man of behavioral economics, having helped pioneer the field at Cornell University in the 1980s. He co-invented (with Shlomo Benartzi of the University of California at Los Angeles) the successful Save More Tomorrow program, which boosts retirement savings by persuading employees to commit part of future pay raises to their 401(k)s. Sunstein is a law professor and prolific writer who specializes in the intersection of policies and behavior.
Nudge is an argument for the gentle steer that neither forces people down one path nor ignores them as they blunder. The authors call it "libertarian paternalism," a deliberate oxymoron. As in the case of placing desserts in a lunch line, they say, institutions inevitably affect people's choices, so they should do so carefully. When the government assigned poor people randomly to Medicare Part D prescription drug plans, they say it was "somewhere between callous and irresponsible" not to nudge them instead toward a plan that would best meet their needs. A word to the wise may be sufficient, but to those of us who are predictably irrational—and who isn't?—a nudge works better.
The Author and the Pols
Richard Thaler is "revered by the leading wonks on Barack Obama's Presidential campaign," according to an article in the Mar. 12 issue of The New Republic. The article describes Thaler and his University of Chicago colleague Austan Goolsbee, who is Obama's top economic adviser, as pragmatic and interested in making policies by "working piecemeal from a series of real-world observations."