I don’t mean to go off on a spree about behavioral economics (although god knows I’m often tempted to!). And my apologies about the clickbait-ish title for today’s post – but it was the title of an essay that I want to speak about today.
Two primary reasons:
Core behavioral economics findings have been failing to replicate for several years, and the core finding of behavioral economics, loss aversion, is on ever more shaky ground.
Its interventions are surprisingly weak in practice.
Because of these two things, I don’t think that behavioral economics will be a respected and widely used field 10-15 years from now.
Is behavioral economics dying? Is it already dead? Did it never have, or need, a separate existence? If you are a student starting out on your journey of discovering (and most probably falling in love with) behavioral economics, how should you think about this question?
Every now and then (and more often than you’d think), it helps to go back to the basics. Here’s a definition of behavioral economics:
Behavioral economics (BE) uses psychological experimentation to develop theories about human decision making and has identified a range of biases as a result of the way people think and feel.https://www.behavioraleconomics.com/resources/introduction-behavioral-economics/
Read the entire essay by Alain Samson, please. It is a great, very readable introduction to the subject.
So if one were to accept that definition of behavioral economics above, it becomes a “testable” statement. We’ll come back to this point later on in this post, because it is a bit more nuanced, but in effect, if you wish to critique the field, you must ask the following questions:
- Do the theories about human decision making, as developed in the field of behavioral economics, really work? Do they make sense? Are they empirically verifiable? Have they been empirically verified, and that multiple times over?
- Are these biases that behavioral economics speaks of real? Do they make sense? Are they empirically verifiable? Have they been empirically verified, and that multiple times over?
This essay makes the point that the answer to these questions is no. Not, I hasten to add, all possible questions. But most certainly the question of whether or not loss aversion is real. What is loss aversion?
It is thought that the pain of losing is psychologically about twice as powerful as the pleasure of gaining. People are more willing to take risks (or behave dishonestly; e.g. Schindler & Pfattheicher, 2016) to avoid a loss than to make a gain.https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/loss-aversion/
In effect, loss aversion says that celebrating upsides ain’t as important to us humans as avoiding downsides. And hey, that’s something all of us can empathize with, right?
But being able to empathize with a statement isn’t the same as saying the effect is real! That’s where testing comes in, and Jason Hreha is saying that the testing didn’t work:
But the biggest replication failures relate to the field’s most important idea: loss aversion.https://www.thebehavioralscientist.com/articles/the-death-of-behavioral-economics
To be honest, this was a finding that I lost faith in well before the most recent revelations (from 2018-2020). Why? Because I’ve run studies looking at its impact in the real world—especially in marketing campaigns.
Is it “umm, whoops!” time all over again for behavioral economics? Alex Imas to the rescue:
OK, we’ve learnt about loss aversion. What is “framing”?
How you, well, “frame” a particular issue is what framing is all about. As Alex goes on to say in that Twitter thread, testing for loss aversion is one thing, and testing for loss aversion given the framing is quite another. In other words, it is the framing that may be the problem, rather than the concept of loss aversion itself.
In addition, there’s literature defending loss aversion:
Well, ok, you’ve read a lot today. But, in the immortal words of Go Goa Gone, what have we learnt, and what do we know?
My take: loss aversion is real. I say this for the following reasons:
- It makes intuitive sense (to me!)
- The original paper was hard to argue with
- There is plenty of research to back up the claim
But do we perhaps emphasize behavioral economics a wee bit too much? Well, I don’t know, but giddy enthusiasm for a subject is rarely a good idea. It is always a god idea to ask how one might be wrong. So while I tend to disagree with Jason Hreha, I would very much want to read more critiques of behavioral economics, precisely because the subject is so intuitively appealing.
And in that vein, this excellent NYT article from a while ago:
Behavioral economics should complement, not substitute for, more substantive economic interventions. If traditional economics suggests that we should have a larger price difference between sugar-free and sugared drinks, behavioral economics could suggest whether consumers would respond better to a subsidy on unsweetened drinks or a tax on sugary drinks.https://www.nytimes.com/2010/07/15/opinion/15loewenstein.html?_r=1
But that’s the most it can do. For all of its insights, behavioral economics alone is not a viable alternative to the kinds of far-reaching policies we need to tackle our nation’s challenges.
Put another way (and regular readers know it was only a matter of time), the truth lies somewhere in the middle.
No, behavioral economics is not dead, is not dying, and is in fact in the pink of health. But one shouldn’t overemphasize the role of behavioral economics either! It is of (immense!) help in reaching outcomes, and often for relatively low costs – but the price mechanism still, well, rules.
P.S. The art of reading critically is a very, very underrated skill. And especially in India, the art of listening critically, as a student, is even more underrated. We’ve been taught to assume that the guy behind the lectern knows best. And we carry that attitude over when it comes to reading stuff as well. As a student, acquire the skill of always questioning what is being told to you, whether in class or otherwise.
“How might this be wrong?” is a question that ought to be front and center when you’re learning. In fact, I’d go so far as to say that it is the best way to learn.
P.P.S And that applies to this essay too! Please, do try and figure out how I might be wrong! 🙂
And because I think this blogpost isn’t long enough already, one final recommendation. Read the conversation between Neela Saldanha and Alex: