Misbehaving: The Making of Behavioral Economics

by Richard H. Thaler

The second obstacle is loss aversion. We know that people hate losing and, in particular, hate to see their paychecks go down. Based on the findings from our fairness study, we also know that in this domain, loss aversion is measured in nominal dollars, that is, without adjusting for inflation. So, if we could figure out a way that employees would not feel any cuts to their paychecks, there would be less resistance to saving more. The third behavioral insight was related to self-control. A key finding from the research on this topic is that we have more self-control when it comes to the future than the present. Even the kids in Walter Mischel’s marshmallow experiments would have no trouble if today they were given the choice between one marshmallow at 2 p.m. tomorrow or three marshmallows at 2:15 p.m. tomorrow. Yet, we know that if we give them that same choice tomorrow at 2 p.m., few would be able to wait until 2:15. They are present-biased.

Cialdini’s basic theme that most people pay on time. Some examples: • The great majority of people in the U.K. pay their taxes on time. • The great majority of people in your local area pay their taxes on time. • You are currently in the very small minority of people who have not paid their taxes on time. If you are wondering, the phrase “the great majority” was used in place of the more precise “90% of all taxpayers” because some of the letters were customized for specific localities, and BIT was unable to confirm that the 90% number was true for every locality used. There is an important general point here. Ethical nudges must be both transparent and true. That is a rule the BIT has followed scrupulously.‡ All the manipulations helped, but the most effective message combined two sentiments: most people pay and you are one of the few that hasn’t.

kibitzing

The team, officially called the White House Social and Behavioral Sciences Team (SBST), began as a small unit of just six behavioral scientists: Maya, two fellows on loan from universities, and three more on leave from not-for-profit think tanks, the North American branch of the Jameel Poverty Action Lab (J-PAL), which specializes in running RCTs, and ideas42, which has behavioral economics as its core strength. In just the first year, the SBST embedded a dozen behaviorally-informed randomized control trials into federal programs, with policy objectives ranging from increasing uptake of veterans’ benefits to helping people pay off their student loans. And the team is growing too. The federal government recently responded to the team’s early successes by committing part of its budget to fund additional team members. Thanks to federal support and the continued support of outside partners, the team should have doubled in size by the time this book is published. Other countries are also joining the movement. A study conducted by the Economic and Social Research Council published in 2014 reports that 136 countries around the world have incorporated behavioral sciences in some aspects of public policy, and 51 “have developed centrally directed policy initiatives that have been influenced by the new behavioural sciences.” Clearly word is spreading.

Whenever anyone asks me to sign a copy of Nudge, I always add the phrase “nudge for good.” Nudges are merely tools, and these tools existed long before Cass and I gave them a name. People can be nudged to save for retirement, to get more exercise, and to pay their taxes on time, but they can also be nudged to take out a second mortgage on their home and use the money on a spending binge. Businesses or governments with bad intentions can use the findings of the behavioral sciences for self-serving purposes, at the expense of the people who have been nudged. Swindlers did not need to read our book to know how to go about their business. Behavioral scientists have a lot of wisdom to offer to help make the world a better place. Let’s use their wisdom by carefully selecting nudges based on science, and then subjecting these interventions to rigorous tests.

One reason we are not witness to a thriving group of behavioral economists doing work on macroeconomics may be that the field lacks the two key ingredients that contributed to the success of behavioral finance: the theories do not make easily falsifiable predictions, and the data are relatively scarce. Together, this means that “smoking gun” empirical evidence of the sort that exists in finance continues to elude us.

When all economists are equally open-minded and are willing to incorporate important variables in their work, even if the rational model says those variables are supposedly irrelevant, the field of behavioral economics will disappear. All economics will be as behavioral as it needs to be. And those who have been stubbornly clinging to an imaginary world that consists only of Econs will be waving a white flag, rather than an invisible hand.