Behavioural economics does not have to be a total loss

Behavioural economics is facing a reckoning. 

For a few decades, the idea of applying human psychology to economics made a dry subject hip and relatable. Before, the field seemed out of touch, full of abstract models that started with the assumption that people would act rationally based on a universal desire to make widgets and get more stuff.

But along came a generation of economists and psychologists with tales of how crazy we all are and how bad we are at understanding risk. The seductive implication was that wise technocrats could use this knowledge to shepherd the irrational masses into better, or at least commercially viable, behaviour.

Now that thinking is looking overrated, as is the idea people can or should be tricked into making better decisions when confronted with risk. Behavioural economics went too far, was oversold, misused and abused. But it is not irredeemable. Among many other lessons, the pandemic has made it clear that instead of goading people into certain behaviour, we are better off using the same insights to help people make better choices for themselves.

Economists are often reminded by well-meaning friends and strangers that economics is flawed for assuming people are rational when they are not. It is not always clear what these skeptics mean by rational — often it is a propensity for making bad decisions. And there is truth in that.  People struggle to make sense of probabilities, especially in the midst of uncertainty. Just look at the difficulty most people have had understanding the effectiveness of Covid-19 vaccines.

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We humans also tend to exaggerate remote risks and ignore more likely events. Even when we accurately assess risk, sometimes we procrastinate doing what's in our best interest or make snap decisions we regret later.

In economics, 'rational' means people are consistent in their behaviour. And they are not. The behavioral economics literature has produced lots of evidence that when people are faced with a choice in a risky situation, their decision may depend on how the data is presented or what they have to lose. 

We have seen many examples in the last year when our friends went to great lengths to avoid any remote risk related to the pandemic, but undertook other risky behaviour, such as driving fast. 

This sort of behaviour leads many economists to rethink their models. The government and companies searched for ways to exploit biases to induce certain conduct. Having a behavioural economist on staff became trendy at many corporations. The British government even created a Nudge Unit.

Now we may have reached peak nudge. It was recently revealed that famous behaviouralist Dan Ariely used what appears to be faked data and retracted one of his most famous studies about how to encourage honesty when the results could not be replicated. Even before that scandal, there were several instances where well-known biases could not be replicated and evidence was weak that all the nudging could make a difference.

The environment is primed for a backlash after more than a year of many people feeling the government has not been straight with them when it came to pandemic risk taking (though behavioural economics is not to blame for that). Jason Hreha, the former Global Head of Behavioural Science at Walmart, this year declared behavioural economics dead.

Cass Sunstein, an early proponent and co-author of the book Nudge, has defended the approach. He argues nudges should be used to help people make better decisions, rather than manipulate them. He also points out nudges are less intrusive than mandates and other restrictions.

To be fair, behavioural economics is a large, new field and there are no clear standards on who can call themselves an expert. Some abuses were inevitable. The field has also had some victories: Automatically signing up people for retirement accounts increased saving; automatically signing children up for free school meals reduced hunger.

But generally, the idea we could nudge people to make better choices by exploiting their behavioural biases was always oversold. It is hard to persuade people to do something they do not want to do, especially when you do not fully understand their unique motives. And if data is not presented clearly and honestly, attempts to nudge people can be self-defeating when they do not trust you.

There is scope to do better. Rather than nudge people to take or avoid certain risks, the goal of policy makers, the media and corporations should be to find ways to communicate risk in ways that are more likely to make sense to people. Probabilities are a relatively modern invention. But humans have been dealing with risks for thousands of years. 

Psychologists like Gerd Gigerenzer argue that the experts should and can find ways to communicate risky choices in a way people connect with and is natural for them. One simple example is talking about frequencies instead of probabilities, since one out of 100 is more intuitive than a 1% chance.

The behavioural economics backlash should prompt a rethinking of how the discipline's insights can be used to communicate risk in ways that are clear and understandable. And then trust people to make the right choices for themselves.

Allison Schrager is a senior fellow at the Manhattan Institute and a contributing editor of City Journal. To contact the author of this story:
Allison Schrager at [email protected]. 

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.