These days the words "behavioral economics" are on everyone's lips (at least where I hang out). Whereas neoclassical economists tend to focus on rational decision-making, behavioral economists try to understand our irrational decisions - which, obviously, abound.
If you're looking for a primer, Dan Ariely, a professor of economics at Duke, gives a quick, fascinating overview of the economics of irrational decisions in an excellent interview at the Journal of the Royal Society for the Encouragements of Arts, Manufacture, and Commerce. What makes behavioral economics new and useful? Mainly, Ariely explains, a shift in emphasis from the ways in which people are rational to the ways in which they're predictable. (Ariely has a book out called Predictably Irrational.)
Many decisions are, of course, made rationally - think of buying the generic drug instead of the name-brand. But those decisions aren't representative: we also make decisions in a predictably irrational way. Predictably irrational decisions are often mistaken for rational ones. For example, Ariely explains, "we don’t anticipate how emotions will influence us, even though their influence is systematic and predictable." And we're also predictably and irrationally affected by social life, and by the social norms we see around us:
In one experiment, we gave students a chance to cheat publicly on a test and found that, once one student had cheated, several others would as well. This was only the case, however, if they thought that the cheating student was part of their ‘in-group’. . . . It’s likely that this is what happened in the MPs’ expenses scandal in the UK, when MPs started behaving in a corrupt way because they saw a few of their peers were doing it.
Clearly, the fact that people do stupid things just because cool people do them is hardly surprising. What's surprising is the robust predictability of that behavior. To put it another way: everybody knows that people act irrationally; what's interesting is that people are predictably irrational, rather than arbitrarily and idiosyncratically so.
This simple idea is useful in two ways. First, it might help us design public policies which take into account predictably irrational behavior. (Ariely cites the example of laws against texting while driving - predictably and dangerously, they've only encouraged people to "text below the wheel" rather than above it.)
Second, it might also help to undercut the rhetoric of rationality which too often covers for and justifies obviously irrational behavior, like the behavior which underwrote our financial crisis. The main insight is that no one makes perfectly rational decisions. As Ariely puts it, "people who deal with large amounts of money are as capable of irrationality - from reckless gambling to myopia and overconfidence - as anybody else."
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Leon Neyfakh is the staff writer for Ideas. Amanda Katz is the deputy Ideas editor. Stephen Heuser is the Ideas editor.
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Guest blogger Ruth Graham is a freelance journalist in New Hampshire, and a frequent Ideas contributor. She is a former features editor for the New York Sun, and has written for publications including Slate and the Wall Street Journal.
Joshua Rothman is a graduate student and Teaching Fellow in the Harvard English department, and an Instructor in Public Policy at the Harvard Kennedy School of Government. He teaches novels and political writing.