Behavioral Economics Policy Impact and Future Directions (2023) / Chapter Skim
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Part III provides the committee's guidance for the future of the field. Chapter 12 addresses ways to strengthen behavioral economics research methods.
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. A history of behavioral economics and its applications: What we know and future research directions.
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Part I Understanding Behavioral Economics
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The development of behavioral economics as a distinct field is just one of many important developments in economics in recent decades. Rapid gains in computing power and the availability of new kinds of data, along with new methodologies for analyzing data, have contributed to important advances in most social science fields, and economics is no exception.1 Economists have also increasingly extended the application of their methods beyond traditional areas, such as the analysis of financial markets, to support the development of public policies to address a wide range of issues, including environmental protection, public education, and poverty.
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However, these models assume that people behave with a certain level of rational ity, and it is there that behavioral economists have diverged, arguing that actual human behavior does not demonstrate this degree of consistency. Behavioral economists, thus, attempt to enrich traditional economic models by incorporat ing additional behavioral insights, derived primarily from research in psychology.
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Cognitive psychologists, particularly Daniel Kahneman and Amos Tversky, contributed concepts that have been critical to the development of behavioral economics. They systematically documented how heuristics (short-cut problem-solving strategies)
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The Russell Sage Foundation played an important role in supporting this summer school and other initiatives in the area. Learning from Laboratory Experiments While one set of insights for behavioral economics came from cognitive psychology, another source for understanding the significance of human 5Taste for fairness refers to the fact that "a wealth of experimental data corroborates the everyday observation that people care about, and respond to, fair and unfair treatment.
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. What distinguished these scholars was their interest in how individual behavior produced outcomes in specific institutional contexts.7 Experimental economists examining the behavior of individuals and groups in controlled conditions were confronted by the complexity of human motivation in the course of their attempts to test formal game theory in laboratory experiments.
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. Behavioral economics has achieved considerable success and influence in economics; the awarding of two Nobel Memorial Prizes for behavioral economics research and experimental economics highlighted the field's growing influence.10 By taking the utility-maximizing model typically used by traditional economists as a baseline and building related models that incorporate behavioral elements, and by adopting state-of-the-art empirical methods to obtain field evidence (such as natural experiments and randomized controlled trials)
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INFLUENTIAL BEHAVIORAL IDEAS A wide range of psychological findings have been influential in the development of behavioral economics. That mass of evidence covers human emotions, cognitive processes, and behavior, as well the complexity of social interactions.
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. Researchers have also suggested that efficient coding extends to the domain of risky choice and could explain why risk-taking behavior varies across different environments (Frydman & Jin, 2022)
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A decision maker may prioritize processing of information that is of highest relevance to particular goals, such as gaining the most reward in the least amount of time. For example, one study has shown that visual fixations and choices in simple choice tasks approximate an optimal information sampling policy to maximize rewards and minimize costs when taking account of environmental constraints (Callaway, Rangel, & Griffiths, 2021)
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This specification provides a formalized way of understanding how preference is constructed during deliberation. This modeling approach has been used as a descriptive theory of human behavior, as well as a theory for studying the optimal ity of human decision making because of its relationship to Bayesian inference (Bogacz et al., 2006)
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Empirical studies have also shown that decision makers prefer options they can remember better (Kraemer et al., 2022)
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, that make behavioral economics models different from those usually developed in other disciplines. Myriad Contextual Influences Behavioral research has shown that humans are deeply influenced by their immediate contexts, including the time and place, the social and economic environment, and the relationships they have with other people at the time.
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DEVELOPMENT OF BEHAVIORAL ECONOMICS 29 difficult decisions, and even attitudes toward gains and losses. Fairness and social norms have appeared extensively in the work of economists working in traditional frameworks and in the work of scholars in other disciplines, but the interaction of those factors with difficulty in individual decision making and attitudes toward gains and losses has not been emphasized.
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and from the information available to an individual. The behavioral economics framework views the problem through a different lens, positing that decisions are not directly the product of rational calculations of objective probabilities of states of the world but rather the product of assessment of the world as the person has mentally represented it.
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As this sampling of the large landscape of work on human cognition and behavior suggests, there is a firm empirical base of understanding about the ways humans process and act on information that can be integrated into the work of behavioral economists. Conclusion 2-1: There is strong evidence that people's decision making is affected by two factors: • perception bias, attention bias, and memory bias all signifi cantly influence the way people understand available options and make decisions about them; and • complex aspects of the specific context can influence people's perceptions and the decisions they make.
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While only a few colleges and universities taught behavioral economics, experimental economics, or behavioral game theory in the 1980s and 1990s, most major universities now offer such coursework. Behavioral economics approaches have also gained popularity as a tool for policy makers, and the consultants who advise them, to use in designing policies that take account of what is known about human cognition and behavior.
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We kept them in mind as we reviewed the literature and developed our recommendations. We note here the responses behavioral economists have offered to several frequently raised concerns: • behaviorally based interventions may in some cases reflect an un examined paternalistic attitude toward the targets of behaviorally based interventions; • many behavioral economics studies showing positive effects have comparatively small effect sizes; • interventions that focus on individual-level behavioral change may distract from or undermine policy attention to the need for system level change; • behavioral insights may be exploited by nongovernmental private agents, such as in the realms of political influencing and commer cial marketing; • behavioral interventions may have the unintended negative conse quence of exacerbating disparities in society; and • the representativeness in the samples used in behavioral economics research is often lacking.
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. They make the point that some behaviors operate below the level of consciousness and that interventions that affect them could have a negative impact on the well-being of people targeted by such interventions.12 A particular concern for behavioral economics is that decisions based on factors other than reasoning may in many cases be valid and that the idea that people need to be nudged or otherwise induced to make more seemingly rational decisions reflects a narrow understanding of human rationality.
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Small Effect Sizes A second critique is that many, though certainly not all, behavioral economics studies showing positive effects have comparatively small effect sizes. There are examples where extremely large gains have been documented, such as for automatic pension deductions.
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The committee was not able to explore these issues, which concern ways behavioral economics research is used rather than the nature of the research and analysis produced by the field. However, we note that there is a growing body of research that will be of value as policy makers consider ways to address them (see, e.g., Petticrew et al., 2020; Shahab & Lades, 2021; Mills, 2023)
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