Oh, Behavioral

Maybe it's just the boogeymen in my closets, but I constantly note with amusement, irritation, and anger the omnipresent assumption that people want to make good decisions and would do so if they had the chance (and the right information and a level playing field, et cetera). This assumption is most prevalent in any kind of discussion which impinges on economics, of course. Right, center, and left, commentators usually assume that, for instance, Americans will rationally pick the most effective health care plan - which is, usually, the one to which the commentator is committed: a market-based individualized arrangment, a blend of governmental and private initiatives, a state-run system.

As Craig Lambert shows in this article on the increasingly influential field of "behavioral economics," it's hardly too much to say that economics, as an academic field and as a tool of government action, is built on this politically neutral assumption of human rationality. Luckily for the irrational masses, the behavioral economists are chipping away at that foundation, and exposing the far more interesting patterns of thinking and action which seem to actually underlie the way we act.

Consider a project like starting an exercise program, which entails, say, an immediate cost of six units of value, but will produce a delayed benefit of eight units. That’s a net gain of two units, “but it ignores the human tendency to devalue the future,” [Harvard Prof. David] Laibson says. If future events have perhaps half the value of present ones, then the eight units become only four, and starting an exercise program today means a net loss of two units (six minus four). So we don’t want to start exercising today. On the other hand, starting tomorrow devalues both the cost and the benefit by half (to three and four units, respectively), resulting in a net gain of one unit from exercising. Hence, everyone is enthusiastic about going to the gym tomorrow.

Now that's an execise program I can support! First thing tomorrow.