
It’s time to bring more realistic models of human behaviour into economic policy - AndrewDucker
https://bankunderground.co.uk/2016/08/23/its-time-to-bring-more-realistic-models-of-human-behaviour-into-economic-policy-and-regulation/
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nabla9
Rational choice theory, the current model of human behavior used in most
mainstream economism, is undoubtedly the best first order approximation. It
works surprisingly well even when everybody knows it's incredibly crude and
inaccurate model.

Next step to improve upon state of the art should be something only slightly
more complex. The best candidate seems to be Regret theory. "Regret theory: An
alternative theory of rational choice under uncertainty", Economic Journal,
92(4), 805–824, Loomes, G. and Sugden, R.

Rational choice theory assumes that people don't have internal time dependent
state in their choices. Regret theory adds the anticipation of regret. It adds
just one term into utility function but it covers many aspects of human
behavior. There is also empirical support backing it up.

[http://people.few.eur.nl/wakker/pdfspubld/15.2regret_history...](http://people.few.eur.nl/wakker/pdfspubld/15.2regret_history.pdf)

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inputcoffee
Tversky and Kahneman, who are seminal in the field of "biases" in psychology
(for lack of a better term), were explicit in their hope of informing the
utility functions that economists use to model decision making and well being.

Kahneman famously won the Nobel in economics as a sort of belated
acknowledgement. (Belated because Tversky passed away before they got it).

~~~
r00fus
recommend s/belated/posthumous/

~~~
slavik81
That would be incorrect. The Nobel prize is not awarded posthumously.

~~~
bjelkeman-again
And it isn't a Nobel price. It is the "Swedish National Bank's Prize in
Economic Sciences in Memory of Alfred Nobel".

[https://en.m.wikipedia.org/wiki/Nobel_Memorial_Prize_in_Econ...](https://en.m.wikipedia.org/wiki/Nobel_Memorial_Prize_in_Economic_Sciences#Controversies_and_criticisms)

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maxerickson
How about economics just influencing policy?

Blah blah dismal science and all that, but microeconomics is considerably less
hand wavy than macroeconomics and at least in the US there are all sorts of
policies that pretend that people don't respond to incentives (never mind if
they respond as homo economicus or not).

~~~
fdgdasfadsf
The trouble is not that they don't respond. It is that they tend optimise for
the incentive rather than for what the incentive is intended to achieve -
which are not always the same thing.

~~~
maxerickson
Part of my meaning was that there are programs created without much attention
to the real incentives they create. The programs have abstract goals.

If you buy the microeconomics hype, you'd at least examine what sort of
incentives you are creating in that context.

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ggreer
It's true. The standard economic assumptions (people have rational
preferences, are purely selfish, and have perfect information) don't reflect
real-world humans. But that's what makes them robust. Human behavior and
culture can change drastically, but standard econ tools still work. They can
predict and explain outcomes in ancient Rome just as effectively as present-
day San Francisco.

Behavioral economics is very useful, and there are still tons of unexplored
questions in the field. But importantly: behavioral econ is more speculative
than standard econ. Behavioral econ models depend on getting both econ _and_
human psychology right. Even if such models are fleshed-out, human behavior is
quite plastic. So behavioral models are less likely to be correct when applied
outside of present-day western culture.

~~~
pnutjam
"Human behavior and culture can change drastically, but standard econ tools
still work."

But they don't work, econ is not much better then throwing bones.

~~~
pzone
Do you honestly believe that? Would you say "psychology is not much better
than throwing bones" or "epidemiology is not much better than throwing bones?"
Because the demands for statistical rigor in economics are far greater than in
those fields.
[http://qje.oxfordjournals.org/content/by/year](http://qje.oxfordjournals.org/content/by/year)

~~~
mr_overalls
Well, economists like Deirdre McCloskey have argued that many empirical
economic studies have been poorly reported, statistically-speaking.

[https://web.archive.org/web/20080625054144/http://www.econjo...](https://web.archive.org/web/20080625054144/http://www.econjournalwatch.org/pdf/ZiliakMcCloskeyAugust2004.pdf)

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AnimalMuppet
Two really interesting things in the article:

> Raj Chetty has estimated that every $1 of tax subsidy only leads to around 1
> cent of additional saving (making it a pretty good place to start if you
> have a large budget deficit to sort out).

Wow. That's horrific. I suspected it was inefficient, but this is much worse
than I thought.

> Think about ‘social trust’. It’s a better predictor of national economic
> growth rates than human capital, and varies greatly between countries.

Viewed alternately: Mistrust is a drag on economic growth. The people I spend
to keep you from ripping me off are people that make no net contribution to
the economy as a whole.

And here's my take on what needs to happen to macroeconomics: People want
different things. Some want savings. Some want status. Some want to improve
their human capital. Some want to have fun. (And, there may be other major
categories as well.) In fact, _most_ people want several of those things. At
any given time, they seek several different goals. The economy is made up of
people who have different amounts of emphasis they place on the different
categories, but the economy as a whole might be characterizable by the sum of
peoples' emphasis on each of the categories.

A change in circumstances can make them change the emphasis that a person
gives to different category. A large, economy-wide change can change a the
emphasis of a whole lot of people, _and therefore change the behavior of the
economy as a whole_. Macroeconomics might be able to figure out from, say, the
shock of 2008, that many people are going to be in fear, and place much more
emphasis on preserving their savings, and from that figure out what the effect
on the economy will be going forward (at least until peoples' perception of
their circumstances changes).

~~~
Gibbon1
> The people I spend to keep you from ripping me off are people that make no
> net contribution to the economy as a whole.

Saw one estimate that high inequality countries spend about 25% of their
economic output on 'security' Think six able bodied men 'working' AKA sitting
all day outside a bank with machine guns. One problem with economists are they
refuse to see that as a problem.

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woodandsteel
One of the barriers to integrating more realistic psychological ideas into
economics is that the ideas about human nature in political ideologies such as
conservatism and liberalism include mistaken assumptions.

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chrismealy
If economists could manage to get themselves thought of as humble, competent
people on a level with dentists, that would be splendid.

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force_reboot
As someone with a PhD in economics, and a believer in the what the mainstream
econ departments teach, I still found this article very reasonable. I hope no
one will take this article to be saying that orthodox economics is
_fundamentally_ flawed because at no point is that argued. Instead they argue
that behavioral biases exist and are well enough understood that we can in
some cases craft policy based on them, instead of the standard economic
assumptions.

My favorite points were

\- Unpack ‘animal spirits’. These arise in the minds of economic actors. We
can unpack the biases behind them and do something about them – an indeed BIT
is currently working on such a project.

The debate on "animal spirits"[0] is ongoing, but the potential payoff from
understanding them is huge. They deserve more research using more modern ideas
and methods.

\- Promote rainy-day saving. Recent work suggests that the behavioural and
economic effects of having even small amounts of saving are even larger than
previously thought.

There are two contradictory arguments often made in regard to poverty and
rational behavior: (A) poor people are completely constrained by their poverty
and unable to make the "right" decision to save and (B) poor people are unable
to make rational decisions because poverty affects their decision making
ability. I am mostly in the (B) camp and as such, I think that helping poor
people to behave more rationally is a great idea. However it does require
honestly stating that poor people do make bad decisions, even if anyone else
in that situation would have done the same.

The weakest point IMO was

\- Trial light-touch ways to improve estimates by key economic actors.
Encourage the use of estimation frames.

This is based on a claim that is much more general, and therefore requires
more evidence. I would like to see a lot more studies on improving estimation
accuracy in general, before I accepted that there is some general formula to
make people's estimates more accurate.

[0] A term of trade for Keynes' original, but discarded by the mainstream,
idea that markets were moved by irrational exuberance/pessimism by society as
a whole. The main advocate of this theory today is Robert Schiller.

------
ThomPete
Yes please and lets start with finding ways to include technology and
technological progress not as an externality but as an integral part of the
equation.

~~~
yummyfajitas
You mean like the Solow model?

[https://en.wikipedia.org/wiki/Solow%E2%80%93Swan_model](https://en.wikipedia.org/wiki/Solow%E2%80%93Swan_model)

~~~
pzone
The Solow model is a model of capital accumulation, not endogenous
technological change per se. Romer (1986) is a better example.

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jonmc12
I've thought China's Sesame Credit system could be interesting in this
direction. I know there are some dystopian perspectives on the program. At the
same time, consider how much they can learn about consumer behaviors from the
aggregated data. And, they can even control this behavior to some degree
through gaming mechanics (compulsion loops / social impact).

I don't know much about economics, but it seems this kind of environment (a
national-scale, economic video game) could provide a mass of data to inform
the 10 suggestions from the author. "practice based on plausible myths" \- the
opposite of this is practice based on meaningful, real-time data about
economic actors, right? Would be very curious of an economists opinion of the
role of such a system..

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alexmingoia
Economic policy needs to understand human behavior more so the author suggests
QR codes on dollar bills so people can track their spending.... Ummm what ?

~~~
m-i-l
When the author says "add QR codes on bills so that consumers can easily
extract their consumption data and make better choices", I think they mean
"bill" as in a printed or written statement of the money owed for goods or
services, rather than "bill" as in US banknote.

~~~
Brakenshire
Yes, bill means receipt in British English.

~~~
_9MOTHER9HORSE
It doesn't so much mean receipt as "invoice" (e.g. for taxes or utilities) or
"check" (e.g. in a restaurant)

In most restaurants you would ask for the bill, then when you pay, you will
receive a separate receipt.

The receipt is proof of payment.

~~~
Brakenshire
Yes, that's better put.

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emblem21
The problem with rational choice is a paradox: Not only can the individual
respond to incentives, the individual can also prioritize incentives based
entirely on subjective rationality.

You can know the decision an actor makes, but not the motivation. You can know
the motivation an actor has, but not any future decision.

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sandworm101
>> Shift focus from products to ‘choice engines’. Get Price Comparison sites
to do the work – but make sure they stay clean.

HAHAHA! That is honestly one of the most laughable statements I've seen in
years. Yes, "get the internet to fix it". The idea of useful price comparison
sites free of bias and toxic reviews magically arising from the chum is
lunacy. We all know how useful Amazon reviews are, or how travelocity has
produced a generation of purely rational travel consumers.

~~~
mistermann
In my experience amazon and TripAdvisor reviews are pretty decent.

~~~
0xfeba
I've been seeing more and more 'compensated' reviews on Amazon, or even worse,
lots of suspiciously short 5 star reviews. Some product groups are worse than
others but it only seems to be getting worse.

~~~
aninhumer
FWIW, the majority of compensated (free product) reviews I've seen on Amazon
have been surprisingly critical.

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grabcocque
Actually the time was 150 years ago, but you do you, economics.

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crimsonalucard
I think human systems are complex enough that the butterfly effect leads to
inherit unpredictability that cannot be foretold by any model.

~~~
drauh
The climate system on Earth is subject to the butterfly effect, but we
frequently have good-enough predictions, e.g. the stuff airline pilots rely
on.

When confronted with complexity, throwing up hands is not the correct
response.

