Now It's Time for the Group Hug (Author One-on-One: Tim Harford)

Like Dan, I have enjoyed this discussion very much, and I hope that's true of Omnivoracious readers. It has been hard work--in a good way--and forced me to think carefully.

Let me finish by writing a bit about a subject I've been thinking about recently--it might help us find a bit of common ground and show why this discussion is important. Let's think about the problem of climate change, which is widely believed to require us to cut back a lot on our emissions of carbon dioxide. So what should we do?

Standard economics has a solution: a carbon tax, or a tradable permit scheme, to raise the cost of emitting carbon. We'd all have an incentive to cut down by driving less and turning down the heating or air conditioning, and also by insulating our homes and finding more efficient cars and fridges. Businesses would also cut back, and would have an incentive to develop new technologies.

Behavioral economics draws attention to different considerations. For example, we're not as smart as conventional economics assumes, which means that we might fail to notice ways to reduce our energy bills. We might also need to be reminded about what our neighbors are doing: psychologist Robert Cialdini showed that we're more likely to recycle if we think everyone's doing it. That may hold true for carbon-saving too. And although we're reminded of high gas prices every time we fill up, we really need to be reminded of them when we're buying a new car or a new fridge.

So which approach is right? That's a strange question. They can both be right, and I think that they both are.

Of course, the economic incentives will work. I don't think there's any serious doubt that raising the price of carbon would persuade us to pollute less. The Logic of Life showed that we are sensitive to these simple incentives in the most unexpected situations. For instance, raising the risk of unprotected sex persuaded American teens to have more oral sex instead; and two Australian economists, Joshua Gans and Andrew Leigh, have found that tax incentives can persuade pregnant women to delay labor, and even deter people from dying too quickly. (It's really true: the death rate in Australia dropped in the week before inheritance tax was due to be abolished, and then sharply rose the week immediately after. A lot of people were clinging on to life to avoid their estates being taxed.) If people will change their date of death or the day they have a baby in response to a tax incentive, I am quite sure that they will be more environmentally friendly, too.

But I am also sure the behavioral insights will produce results. Cass Sunstein and Richard Thaler report one dramatic success: people cut back dramatically if the electricity company gives them an "Ambient Orb" that glows red when they're using a lot of power. There's no standard economic theory that explains why that should be; and that is just one example.

So we need insights from both economics and psychology to make the world a better place. And I know that Dan will agree with me when I say that whatever we try, we should be checking carefully to see whether the idea is working as predicted, because the world is full of surprises.

Thanks to all Omnivoracious readers for dropping in on our debate.

Your logical friend,
Tim Harford

Comments

[Federico Piacenza on December 17, 2008 at 04:00 PM]

I think a possible integration between economics and psychology can happen if we don't forget humans can learn. People behave in a rational way in some aspects and not in others.

We very well know that babies and children are not very rational, we also know that some people are more rational than others, and there are some guys who are very good at something but perform very bad in other aspects of their life.

The thing is: humans learn. We are not born super-rational. So, it is expected to find more rational behaviour when people are facing a familiar situation in contrast to people facing a novel situation.

So, my point is: humans behave like Dan describes in his book only in novel situations, but when they face a situation they are used to, a situation that they have encountered several times in their life, they behave rationally.

That's the difference between an expert and a rookie: the first time you've played basketball you'd probably taken a lot of very bad decisions, but as you kept on playing you're ability to make rational decisions in that situation increased.

In real world situations, when observing markets we see an aggregation of pro and rookie players, rational and irrational, a mixture of them. So, it's expected to see large irrational moves in emerging markets facing novel situations (dot com bubble) and to see rational behaviour in stable markets where most players are experts.

In the same way, in the early days of basketball, players used to take very unwise and irrational decision and today players are really good at making those decision. So, not only humans learn, groups learn, markets learn and societes learns.

So, the integration is there but only if we consider that human beings can change, learn, and adapt.

[Federico Piacenza on December 17, 2008 at 04:24 PM]

Also, I think classical micreconomics makes a tacit assumption that is unlikely to be true: the cost of thinking and decision making.
According to the classical view either the cost of thinking is zero or the brain has unlimited resources.

But, probably thinking has a variety of costs. At least, thinking and decision making takes time, and we all know time is a limited resource.

So, if we take into account the costs of thinking it's likely that lots of decisions we would consider "irrational" may very well be very rational. And again, familiar situations require less thinking than novel situations.

Let's take for example Dan's experiment with the stand that gave away Hershey's Kisses in a public building. Apparently people tended to make irrational decisions when they choose what to do, but it's very likely than most people didn't want to spend much time figuring out what was the best and optimal option for them. Time that may very well be better used somewhere else.

Consider this: would you take 5 minutes of your life choosing between two options, knowing that if you choose well your profit will be 14 cents? Probably not.

Of course, that depends on your income, your wages and opportunity costs, what else can you do with those 5 minutes?

And here, we are only considering time as cost, but.. What about energy, attention, suffering, pain?
If you are tired, you are less likely to make good decisions.
If there are several things in your mind, you don't have unlimited attention, you must choose what to think.
Some people may feel pain or suffer when they think about certain things... Take maths for example and you'll probably know someone in your life that hates maths.

So, when thinkings costs are too high or the expected outcome if thinking is not worth it, we skip it. Simple as that. Instead we take prefabricated decisions: rules of thumb. Or worst: we act randomly.

That may very well explain why repeated experiments about irrational behaviours are not consistent: maybe, humans are acting randomly because thinking is not worth it.