Saturday, April 10, 2010

Nudge Nudge, Wink Wink

Andrew Ferguson on Behavioral Economics in the Obama Administration. A few key graphs:

As the surge was being debated, the behavioralist Daniel Kahneman published an essay that was intended as a rebuke to Bush’s warmongering. Kahneman pointed to “several well-known laboratory demonstrations” proving that “hawkish beliefs and preferences .  .  . [are] built into the fabric of the human mind” and hence not entirely rational. A hawk’s irrationality takes many forms, upon each of which the behavioralists have bestowed a complicated name. He mentioned “reactive devaluation” and “illusion of control” and “the fundamental attribution error” and much else. Unchecked, these cognitive biases might lead a nation, or at least its leader, to escalate a war foolishly, based upon nothing but reptilian instinct.

In hindsight, of course, Bush’s decision doesn’t look irrational at all. And it didn’t seem irrational to lots of reasonable people at the time. Kahneman’s decision to cast the prudential question of the surge as a contest between reasonable science and blind biological urge was silly at best, sinister at worst.

Aside from being wrong—and unreasonable, to boot —the Kahneman essay illustrated one of the salient tendencies among behavioral economists. Their definition of “irrational” is slippery. It can apply to any opinion or style of behavior they disagree with on political grounds. Consider the landlord initiative mentioned above. It’s telling that the Obama regulators consider this a case for behavioral economics. If a landlord chooses to waste energy with inefficient appliances, traditional economics would give him the benefit of the doubt and search for reasons why he might do that. His rationality, that is, would be assumed. But the Obama regulators presume the landlord’s behavior is irrational and ripe for a correction based on their behavioral insights. And why is the landlord being irrational? Because wasting energy has social effects (global warming, increased dependence on foreign oil, and so on) that the behavioralists dislike and the landlord discounts. Such behavior, in their view, is irrational on its face, the symptom of a cognitive bias—“myopia,” maybe, or the “endowment effect.”

The behavioralists are often caught smuggling in a normative and political judgment under the cloak of disinterested science. A hidden assumption is easy to conceal because the science that the behavioral economists draw upon is highly elastic, not to say flimsy. One cognitive bias that the behavioralists don’t mention, though its lure seems irresistible, is the bias that makes human beings swallow uncritically the declarations of social science. The bias deters the layman from snooping around to see if the science makes sense. This is the well-established “chump effect,” a name I just made up. It accounts for the breathless reception given to the books by Gladwell and the other popularizers of sociological and psychological research. “Findings reveal .  .  .” “Scientists have uncovered  .  .  .” “Research has shown that .  .  .” And we swoon.


Behavioral economists deny any ideological intent in their work. The closest I’ve seen any of them come to conceding a political point of view was when Thaler, in a recent interview, said, “If there’s a regulatory philosophy in behavioral economics, it’s that we should recognize that people in the economy are human and that there are people out there trying to take advantage of them.” In this sense, behavioral economics is just conventional 1960s liberalism—and conventional 1960s economics, too—that assumes the free market itself is a kind of unending con game, with the smart guys exploiting the saps. As an advocate for the market’s hapless victims, the government has the responsibility to undo the con, a task that will require only the smartest administrators operating according to only the latest scientific research and making the most exquisite moral judgments.

You can see how useful the notion of irrational man is to a would-be regulator. It is less helpful to the rest of us, because it runs counter to every intuition a person has about himself. Nobody sees himself always as a boob, constantly misunderstanding his place in the world and the effect he has upon it. Surely the behavioral economists don’t see themselves that way. Only rational people can police the irrationality of others according to the principles of an advanced scientific discipline. If the behavioralists were boobs too, their entire edifice would collapse from its own contradictions. Somebody’s got to be smart enough to see how silly the rest of us are.

Traditional economics has always been more modest. Assuming the rationality of man was a device that made the discipline possible. The alternative—irrational people behaving in irrational ways—would complicate the world beyond the possibility of understanding. But the modesty wasn’t just epistemological. It was also a democratic impulse, a sign of neighborly deference. A regulator who always assumed that man was other than rational was inviting himself into a position where he could exert a control over his fellow citizens that wasn’t proper for a true democrat. Self-government demands this deference. It won’t work otherwise.

“Ultimately,” the economist Brian Mannix wrote not long ago, “we insist that our regulators start from a presumption of rationality for the same reason that we insist that our criminal courts start from a presumption of innocence: not because the assumption is necessarily true, but because a government that proceeds from the opposite assumption is inevitably tyrannical.”

Well, maybe not inevitably. Those behavioralists may be smart, but they’re not quick. It’s been 15 months since President Obama gave them 100 days to explain how to use behavioral economics in government regulation. They’re still working on the report.

Read the whole thing: Nudge Nudge, Wink Wink

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