Posted by: Tobias | September 16, 2008

Behavioral Economics Debate

The current issue of Prospect magazine contains a correspondence between Peter Lunn and Tim Harford on how important a development behavioral economics is. Harford writes:

I’m disappointed. I had assumed, given your opening paragraph, that you were going to explain how behavioural economics might have predicted the credit crunch and the commodity boom, or offered a new way to regulate banks. That really would have been revolutionary. Instead, you offer the dear old ultimatum game. I was not surprised to read your lop-sided and unconvincing caricature of orthodox economics (“textbooks” are such a convenient straw man), but I was astonished to see you present a caricature of the subject you claim to be championing.

I am not sure that a “simple experiment” like the ultimatum game does typify behavioural economics. Such experiments have their place, but they also have serious weaknesses. Take this love of fairness, and its application to wages, which you emphasise. No doubt you are familiar with the laboratory work on how workers respond to wage offers. In one celebrated experiment, behavioural economists divided their subjects into “employers” and “workers.” They discovered that when the “employers” paid unexpectedly generous “wages,” the “workers” reciprocated by working unexpectedly hard.

It’s a classic of the field. But the real world remains intractable. The economists John List and Uri Gneezy recently repeated the lab study in the field, advertising real jobs, hiring real workers and paying real hourly rates. They used a controlled trial to see what happened when workers were paid unexpectedly generous rates. And they discovered that the lab results were evanescent: after a couple of hours the gratitude evaporated and the workers slacked off, reverting to the rational self-interested behaviour described in those pesky textbooks. I would not advise personnel departments to rewrite salary scales on the basis of an effect that does not survive past lunch on day one.

Both make solid points, but to me Harford comes out on top and is right to take the hype around behavioral economics down a notch. He also gets extra points for debating style (“You are too vague: arguing with you feels like trying to arm-wrestle a hologram”).

Don’t get me wrong. I think behavioral economics is important and has the potential of greatly improving some models. But I, too, am tired of reading the same caricatures of a narrowly-defined rational choice model and the same, 30-year old examples over and over again. I concur with Harford that it is about time that behavioral research make the jump from 30 economics students sitting behind computers playing games against/with each other to experiments in the real world to see how many of the anomalies survive this jump.


  1. Would have been lovely to hear a critical note like this during one of the courses at Unimaas.

    Printed the article and hope soon to make time to read it completely.

  2. Read it: interesting and at times rather bitchy as well

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