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1970-01-01 02:00:00
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It is difficult to model the behaviour of creatures as irrepressibly social as
humans
RICHARD THALER has won the Nobel prize in economic sciences this year for his
contributions to behavioural economics. It's a well-deserved prize and a
clarifying one, as far as economics is concerned. For a very long time,
economists hoped to treat individuals a bit like particles in physics, whose
activity can be described by a few well-understood rules, which allow
researchers to model and understand complex interactions between particles. The
rules, they reckoned, were things like perfect information, forward-looking
reasoning and rationality. Of course economists understood that individuals
didn't always behave according to those rules, but the idea was that, in
aggregate, the rules would allow for a pretty good approximation of reality.
Then came the behavioural economists, who made it their task to find ways in
which human activity systematically diverges from models using those basic
assumptions. For many of them, the goal was probably to come up with an
alternative set of principles describing human behaviour, so that economists
could get back to the job of modeling the economy. That new set of principles
never really emerged, just a bunch of behavioural oddities. As this week s Free
exchange column notes, one of the big achievements of the behavioural
revolution has been to get economists as a whole to back away a bit from grand
theorising, and to focus more on empirical work and specific policy questions.
Along the way, behavioural economics made some meaningful public-policy
contributions; for instance, the way in which nudges can be used to help people
save more or use less energy. Nudges probably won t save the world, but
whenever economists manage to deliver an actual improvement in real-world
policy we should celebrate it. In some ways, however, behavioural economics is
underappreciated: as in the way it reveals how difficult it is to understand
all the factors affecting human behaviour well enough, at least, to have a hope
of explaining it.
I'll give you an example. In one of Mr Thaler's famous experiments the
dictator game undertaken with Daniel Kahneman and Jack Knetsch one player (the
dictator) is given $20 and told that he can split the sum evenly between
himself and another student or keep $18, leaving the other player with $2. A
rational utility-maximiser would be expected to keep as much of the money as
possible. The authors found, however, that the vast majority of students chose
the even split: strong evidence that concerns about things such as fairness can
be as important in human decision-taking as cold rationality. That, alone, is a
pretty striking challenge to economics-as-usual.
The experiment was subsequently repeated and replicated many times, often using
slightly different formulations. One particular version, conducted by John
List, turned up a fascinating result. If you expand the options available to
the dictator to include taking money from the other player, then few
participants opt to share the money with the other player though, importantly,
neither do most players exercise their ability to take from the other.
What does that tell us? It means that fairness concerns matter a great deal.
But it also tells us that people are constantly looking for social and
institutional cues as to what the socially acceptable courses of action are.
Present someone with a circumstance in which a very selfish individual could
take money from another participant, and the player adjusts his ideas about
what sort of behaviour counts as fair. Behavioural decisions are not made
independent of the setting; worse, even seemingly fundamental notions of
fairness shift depending on the situation.
It s a simple lesson but one which massively complicates the work of
economists. Perhaps we can understand how people behave within a particular
market. But that understanding does not necessarily mean we have learned
something fundamental about human behaviour, because the choices people make
within the market reflect their evolving beliefs about what constitutes
appropriate behaviour within that narrow setting. A different setting, with
different cues, leads to different behaviour. And even in one particular market
slight tweaks to the environment will affect people s judgments about what they
should and should not do.
It is as if economists are working to understand the strategies people play
within a game. But it is a game in which every player is constantly updating
his ideas about the rules and even the objectives in response to what every
other player is doing. It s a vitally important job that economists have set
themselves. But it truly is a dismally frustrating one.