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Wright in Weekly Standard: Examining Behavioral Economics

In an article examining the use of behavioral economics in government regulatory efforts, Professor Joshua Wright expressed skepticism of the theory's effectiveness.

"Even if you discover a real cognitive bias, there will be a good deal of variation within the population, based on cognitive ability and personality traits," Wright said. "And if the bias varies from person to person, you can't assume that the bias will just 'scale up,' in a generalized way, when it's in the marketplace. Thaler and Sunstein will take a single study of a hundred Duke undergrads and say, 'Here's what we found--and here are the public policy implications.' That's not scientific. That's just sloppy."

The article characterizes behavioral economics as a somewhat trendy social science to which President Barack Obama subscribes, describing it as a method by which analysis of research on human behavior is applied to activities such as buying, selling, borrowing, and investing. It compares traditional and behavioral economics and presents arguments against behavioral economics on the basis that limited experimental outcomes may not have bearing on what occurs in the marketplace. 

Nudge, Nudge, Wink Wink, WeeklyStandard.com, April 19, 2010. By Andrew Ferguson.

Excerpt:

"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. 

"But what does 'research show'? What do 'findings reveal'? Usually much less than the behavioral economists want to believe. And they do want to believe. They burrow through stacks of boring journals and come upon an article describing a new experiment with a deliciously provocative conclusion and looking up from the page they can hear the cry: 'Generalize me, big boy! Make me relevant!' Skepticism flies off, and the economists never stop to consider the fishy process by which those provocative conclusions were reached.

"The vast majority come from behavioral experiments that are completely artificial in their construction. Most take place in labs at elite universities, where graduate students and professors pay undergraduates a pittance to sit for varying periods of time and fill out questionnaires of varying length. Sometimes the subjects are asked to interact while the grad students watch them, other times the questionnaires alone suffice to produce the data. 'Behavioral economics,' Thaler likes to say, 'is the study of humans in markets.' Actually, it’s the study of college kids in psych labs.

"An example: In his recent OMB report, Sunstein insists that regulators take account of a cognitive bias called 'probability neglect' in finding ways to impose their soft paternalism. Probability neglect is defined like this: 'When emotions are strongly felt, people may focus on the outcome and not on the probability that it will occur.' Which is to say, when you really want something you tend to be unrealistic about your chances of getting it. Surely that’s true for all of us sometimes, and always true for some of us. But is it a universal pattern of behavior, one reliable enough to enshrine in a one-size-fits-all government regulation?

"Who knows? Behavioral economists trace their detailed understanding of probability neglect to a study from 2001. In three separate experiments, a pair of graduate students from the University of Chicago Business School asked undergraduates from Chicago and Rice University to complete questionnaires. The 40 students from Rice, in Texas, were asked whether they would prefer to receive $50 in cash or 'the opportunity to meet and kiss your favorite movie star.' The methodological details aren’t worth describing here—we can stipulate that the experiments were conducted with the utmost rigor and elegance. What’s notable is that the experiments were thereafter assumed by social scientists to have established 'probability neglect' as a consistent principle guiding human behavior in the marketplace. All thanks to 40 kids from Texas, filling out a form in 2001."

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