“This bullshit again.” That was the impatient view Richard Thaler attributed to his neoclassical colleagues, as he surveyed the battles behavioural economists have fought in previous decades. “I would say that the first twenty years of my career were devoted to responding to putdowns”, he added.
Behavioural economics, as a discipline, has been unusually blessed in the fluency of its leading lights. Kahneman, Sunstein, Halpern, Ariely and Mullainathan are all persuasive, entertaining communicators. That fact has surely contributed to the popular success of its ideas, which have now gone so far beyond the Academy. Thaler’s talk, studded with witticisms and catty asides, was economics leavened with star power; there was even a tentative whoop as he took the stage.
Having reviewed a few of the familiar axioms of behavioural science – context matters; humans are nicer and lazier than econs; make it easy – Thaler focused on the objections made by neoclassicists over the preceding decades, and the arguments he had offered to rebut them.
The first, he reckoned, was Milton Friedman’s “as if” – that individual humans may differ from theoretical assumptions, but in aggregate the predictions hold true. This he felt, might be dealt with simply by pointing to the many, many ways in which average behaviour did differ from what Friedman predicted. The second objection he attributed to Ken Binmore, who argued that “if you raise the stakes, people get it right (or hire experts to do it for them)” and then that “in the real world” – outside the lab – “people learn”. These, Thaler suggested, are contradictory arguments; we get lots of practice at the smallest decisions, and almost no practice at the highest stakes ones. We do indeed learn to mitigate biases in buying milk, but we remain permanently terrible at planning weddings, choosing mortgages and planning pensions.
Thaler was somewhat more patient with Gary Becker’s suggestion that, while most humans cannot calculate probability, they do not need to, and that the few who can would end up in the jobs that required it, advising the others. This more subtle defence of an Efficient Markets Hypothesis – that markets are staffed by unusual people who are good calculators – could be overcome by evidence of biases from even the most well-regarded financial markets, and from highly lucrative areas such as NFL Football, where one would expect these rare real-world ‘econs’ to gather.
Thaler is kinder about neoclassical economics than about neoclassical economists. The former, he maintained, is a beautiful theory that needs only to be enriched; with the latter, his judgments are derisive. On the question of theory, he felt that economics is approaching some big choices. There will be no integrated theory of behaviouralised economics to match the simple, beautiful axioms that have powered the discipline so far. Yet he is chary of the unmanageably large proliferation of theories – one for each behaviour in each context – that characterises psychology and other social sciences. Still, he hoped to see the integration of behaviour into macroeconomic theory; in his view, “Keynes was the first great behavioural macroeconomist, and there hasn’t been a second.”
Paul Dolan’s summary jocularly noted “I find it disappointing that there’s nothing I can argue with.” Answering a question about behavioural forbears, Thaler himself said “I claim no originality.” This was a standard, accessible, easy-to-like recitation of the core tenets of behavioural economics, coupled with a plea to recall that they had once been deeply controversial, and lightened by the dictum that “if it wasn’t fun, it didn’t go in”.
You can find more information about Richard Thaler’s new book, Misbehaving, here.
Audio of the event is available here.
Tom Wein