Behavioral Economics

Behavioral economics is a very cool area. It's percolating into popular discourse quickly, as in this column by David Brooks in the New York Times. Brooks says that behavioral economics will provide guidelines for regulations to protect us from ourselves (referring to the global financial crisis in 2008). I think he overreaches. Economists are not close to figuring out the optimal way to regulate markets! We now suspect that "no regulation at all" is not the right answer. However, we're a long way from a consensus on how to balance systemic risk management with encouraging innovation.

Dan Ariely's book Predictably Irrational illustrates some observed behaviors that are not optimal. James Surowiecki has an interesting extended New Yorker piece on procrastination. Techniques to beat it include defining tasks precisely (vague tasks get deferred), breaking them into smaller pieces (vast long-term projects get deferred), using "external will" such as pre-commitments to force effort, and more.

The Boston Globe gives a few examples of behavioral economics.

The errors we make when judging risks makes us less sensitive to the risk of climate change that to a more tangible and immediate risk (such as a snake).

People systematically underestimate the calorie content of food with a "health halo", such as that labeled "trans fat free".

People are very poor at judging risk (need link here).

People unconsciously act unethically by overlooking information detrimental to their interests and by biasing conclusions in their interests.

Great NYT story entitled "My Personal Credit Crisis" about how an economics journalist got in too deep.

Money can even have an effect on your state of mind.

Here's a New Yorker review of Dan Ariely's book "Predicatably Irrational".

Confirmation bias applies to a view of the value of scientific evidence itself!

Behavioral economics has gone mainstream with politicians.

Here's Charlie Munger's speech on the Psychology of Human Misjudgment

How is Bloomberg's proposed large soda ban about behavioral economics?

Here's an article that says that stress and risk have biological functions, which policymakers can use to influence behavior.

Self-control is also important in decision-making.

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