Tuesday, November 15, 2016

Impossible Conversations: Misbehaving

Kent Aitken RSS / cpsrenewalFacebook / cpsrenewalLinkedIn / Kent Aitkentwitter / kentdaitkengovloop / KentAitken

Our October book was Misbehaving: The Making of Behavioral Economics by Richard Thaler, covering the history of the Behavioural Economics field and what it has meant to our understanding of economics in general. Thaler presents it as somewhat of a personal chronological narrative; he was early into behavioural economics scene and is intimately familiar with how it came to be, which included no shortage of tension with mainstream economics. Oversimplifying a bit, but where traditional economic models assumed rational, profit- or utility-maximizing individuals, behavioural economics injects a healthy dose of human psychology and imperfection. The field explores all the ways that human behaviour deviates from economic expectations, and why.

Practically, it’s useful for businesses and governments trying to set up incentives for customers and citizens and design interactions. Sales play into our psychology, and we react to them irrationally: we tend to think that we’re “gaining” the difference in price rather than spending. Or governments can set up attractive funding models for retirement savings that people will ignore, because it doesn’t fit with their mental model of how they make and spend money.

Richard Thaler and Cass Sunstein became well-known for their 2008 book, Nudge, which focused on the psychology of interaction design. That is, making it easier for people to make a particular decision without changing the underlying policy or program, though some argue that this bleeds into paternalism or manipulation. Regardless, “nudging” talk has made its way into government as a way to maximize the effects of policies - a lever on a lever.

Our discussion ranged from a dissection of the field of economics writ large, opportunities to do more of this in government, whether economists are biased in making policy for non-economists (yes), to existing “accidental” nudges in government (experiments or insights that preceded nudging but would be called it today).

Some of our highlights:

Mathieu Mazur-Goulet

Overall, an enjoyable and memorable read. The book reads as a journey through the (very recent) history of behavioural economics, told by one of its earliest practitioners. I found that the narrative device used -- that of relaying the origins and key understandings of behavioural economics through the author’s personal memories -- an enjoyable way to enliven what could otherwise be a very dry read. 

Having read Sunstein’s Simpler and Dubner and Levitt’s Freakonomics, many of the concepts covered in the book were already familiar to me (e.g.  the role of incentives and fast vs slow thinking), but there were many concepts new to me that I found intriguing. First is the concept of “mental buckets”, which proposes that humans tend to separate money into discrete categories of spending, rather than treat all money as fungible. This leads to illogical behaviour such as taking out a short-term high-interest loan to cover a temporary shortfall rather than take the money out of low-interest personal savings -- a net loss -- in order not to deplete money earmarked for “savings”. Second is the idea that people discount future benefits in favour of benefits today. The further off into the horizon the benefit is, the less it is valued, which goes a long way to explaining why Canadians today aren’t saving enough for retirement. Third is the idea that losses are valued at twice the rate of gains: we would rather get a sure $20 rather than even odds at winning $200 or losing $100. 

While it is not novel to claim that humans are not perfectly rational or logical in their thinking and behaviour, the key takeaway from this book is that humans are irrational in systematic ways. The implication for policy design is that policy can be designed in such a way as account for these very human shortcomings in a way that ultimately benefits recipients. One recent example is the recent expansion of the CPP: a small, bearable cost for workers today will lead to a more secure retirement in the future. 

The ideas in the book, and of behavioural economics in general, are compelling and impossible to ignore -- once exposed to them, it is very hard to believe that we once thought of human beings as, in economics parlance, “rational utility maximisers”. 

Nick CharneyRSS / cpsrenewalFacebook / cpsrenewalLinkedIn / Nick Charneytwitter / nickcharneygovloop / nickcharneyGoogle+ / nickcharney

The book is a lot of anecdote mixed with popular behavioral economic lessons; it can be boiled down to this: people feel loses twice and much as they feel gains. In other words, Machiavelli’s The Prince was early and on point. 

If you've already read any of the literature in this field, you can safely take a pass on this book. 

No comments:

Post a Comment