Behavioral Economics Isn't Dead Yet

Just a few years ago, many were proclaiming the decline of behavioral economics. In 2009, the well-known game theorist David Levine delivered a lecture called “Is Behavioral Economics Doomed?,” in which he casts doubt on some prominent behavioral theories. In a few fields, such as finance, behavioral ideas have gone mainstream; in others, like game theory, interest is slowly building. But in most policy-relevant fields it remains marginal. And many believe that macroeconomics, in particular, will remain mostly untouched by behavioral ideas. University of Michigan macroeconomist Christopher House wrote in 2014:

House has a point -- human psychology is hideously complex, and the various ways that people depart from rationality don’t tend to fit together into a simple, measurable theory. Ultimately, economists want theories they can test with data. Lab experiments help, but economists need to know how people behave in the real world, and for that they have to rely on economic data, which is often sparse. Highly complex theories are impossible to test with real-world data, which is one reason economists are always looking to simplify. There are good reasons to go with a simple but reliable theory that explains only 20 percent of the evidence instead of a complex, hard-to-test theory that could explain 90 percent but might also be full of mistakes.