The first thing about behavioral economics is it takes on the standard
economists' view of people being perfectly rational mathematical machines
and behavioral economics takes that on to say that people are boundedly
rational, that information, cognitive constraint, and other ways in which we
think about things constrain decision-making. The second thing about
behavioral economics is that we are social animals, so standard economics
assumes that we are self-interested, but we've evolved to be very socially aware,
and so we interact with one another in all sorts of ways. So the second thing about
behavioral economics that connects with that is that we have social preferences.
For example, we don't like to see inequality, unequal outcomes, whether
we're suffering them ourselves or we're seeing someone else suffering them.
So the banker sees a beggar on the street; either way, it's not something that we
want to see so. The third thing about behavioral economics that connects with
the fact that we're social animals as well is that we learn socially. So for
example, if you're seeing a
long queue for a bar and there's a bar
next door with no queue at all, often we will assume that the crowd, that the
queue knows something that we don't and so we will join that queue and it
means that we might have reason, a friend might have told us the other bar was
actually quite good, but we ignore that and so all that private information about
how good that bar without the queue might gets lost and so we follow, we herd
along behind others. The fourth thing about behavioral economics is that we are
motivated by things other than money, and so behavioral economists and economic
psychologists talk about intrinsic versus extrinsic motivation.
So extrinsic motivations, the motivations that come from outsiders, and money would
be one of them. Punishments would be another, but behavioral competencies that
we're also mostly motivated by intrinsic motivations such as the desire to do a
good job, pride in our work, all those sorts of things, and once we acknowledge
that these motivations and incentives are more complex, it helps us to
understand far better how workplaces operate, for example. The fifth thing about
behavioral economics is its focus on the fact that we decide quickly. So standard
economics assumes that we use a lot of information, we think quite carefully
about the decisions that we make, but in reality, we are often constrained, have to
decide quickly or we may be faced with a wide range of choices or a lot of
information and it's all very confusing for us. The sixth thing about behavioral
economics, which links into this quick-thinking
idea, is works by Daniel Kahneman and Amos Tversky. So Danny Kahneman's famous
for his book popularizing some of these ideas, Thinking Fast and Slow, and so the
idea is with quick thinking, it's using heuristics, it's using rules of thumb to
enable us to decide quickly. But the trouble with using these heuristics is
that people make mistakes and that happens particularly in the contexts of
risk. We're not very good at risky decision making, so there's various
discontinuities or various irregularities in the way we decide
when we're facing risk that's not captured very well by standard economics. We're not
very good at forward planning, and so we suffer from present bias. So that doesn't
mean that we're impatient. It means we're disproportionately
impatient in the short term. The eighth thing about behavioral economics: In
standard economics to an extent, though I'm simplifying a bit, individual differences
are neglected. Now in modern economics, economist would allow
that differences in age or gender, socio-demographic
characteristics, they can have an influence. But generally, the role of
personality, moods, and emotions are not allowed in standard economics, and this
is a particularly fascinating area of behavioral economics because it's
allowing that different personality types affect how people decide and
choose. The ninth thing about behavioral economics is that behavioral economics
is not well designed for capturing macroeconomic behavior because
behavioral economics assumes that people might be interdependent, they might learn
from each other. All these personality and individual
differences, all these sorts of things, make it very difficult to aggregate, and
the point about standard macroeconomic models is they've got the aggregation
problem really solved. If you've seen that everyone's the same, you just add
every individual up, you've got your macroeconomy, but in behavioral
macroeconomics that's a lot more complicated because people are
interacting, people are different, and so in terms of behavioral
macroeconomics, that's one of the big challenges for behavioral economics to do,
to capture behavioral macroeconomics more effectively. The tenth thing about
behavioral economics is it's very useful to policymakers.
So Richard Serra and Cass Sunstein wrote the pioneering book, Nudge, all about how
policymakers can use nudges to change behavior, and there are various nudges
that people use or policymakers can use, and they very widely use one's
default options.