Justin Fox: Even if behavioural economics isn't new, it is useful

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Opinion

In Germany, about 12 percent of people consent to be organ donors; in Austria it's 99.9 percent. This huge gap is the product not of "different cultures, different norms, or extraordinarily effective educational campaigns in Austria," legal scholar Cass Sunstein wrote in a recent paper, but of a simple legal nudge. "In Austria, consent is presumed, subject to opt out. In Germany, consent is not presumed, and people have to opt in."

This is an example of the remarkable power of defaults, one of the big discoveries of the behavioral economics movement. But when Sunstein, one of my fellow columnists at Bloomberg View and a leading proponent of the "nudge" approach to public policy, presented the paper at Harvard in November 2012, economist Larry Summers questioned whether it was a discovery at all.

Summers told a story about a college acquaintance who as a prank signed up another classmate for 60 different subscriptions of the Book-of-the-Month-Club ilk. The way these clubs worked is that once you signed up, you got a book in the mail every month and were charged for it unless you (a) sent the book back within a certain period of time or (b) went through the hassle of extricating yourself from the club altogether. Customers had to opt out to not keep buying books, so they bought more books than they otherwise would have. Book marketers, Summers said, had figured out the power of defaults long before economists had.

On Friday I went to a Brookings Institution conference on the public policy lessons of behavioral economics. There were gee-whiz research findings and proposals from the likes of Stanford's Raj Chetty, Harvard's David Laibson and Massachusetts Institute of Technology's Antoinette Schoar, plus an account of how the lessons of behavioral economics are beginning to be put to use in government by the Social and Behavioral Sciences Team created by the White House in 2014. But that same Summers critique -- haven't businesspeople known these things forever?-- came up a few times too.

Maya Shankar, the young neuroscientist who leads the Social and Behavioral Sciences Team, described how the rewording of a Defense Department e-mail to service personnel by one of her team members had markedly increased re-enrollment rates (from 23.5 percent to 28.7 percent in the first week after the e-mails were sent in January) for the government's Roth Thrift Savings Plan. Somebody in the audience then mused that anybody with experience in advertising and marketing could have improved on the Defense Department's e-mail; did it really take a behavioral scientist?

Shankar responded that academic behavioral research "gives us the most well-rounded recommendations." Her colleague William Congdon, an economist, added that ad agencies surely possessed valuable knowledge about human behavior, but "it is unfortunately largely private knowledge."

Just bringing insights about human behavior into government, even if they're not new insights from the perspective of private industry, is progress. This is especially important because government policy makers have long listened to (if not necessarily followed) the advice of economists, and until recently the consensus among economists was that people generally made decisions rationally. Behavioral economics has changed that. "The rational economic model was dominant in policy circles as recently as 1995," said Laibson, who is chairman of the economics department at Harvard. "It's not anymore."

But it's still an interesting question: Have behavioral economists really discovered anything new, or have they simply replaced some wrong-headed notions of post-World War II economics with insights that people in business have understood for decades and maybe even centuries?

Laibson said he has tried to learn from advertisers and marketers, but mostly been disappointed. "I've actually been struck by how much they depend on intuitions," he said in response to a question from Brookings research analyst Peter Olson. "There are catalog companies that do lots of A/B testing; but it's sort of low-brow A/B testing. It's not conceptual like loss aversion."

So this is what behavioral economists do. They come up with theories for why people act in certain strange ways, they test those theories with experiments or against economic data, then publish the results so that the rest of us can learn from them. That actually seems pretty useful, even if the people at the Book-of-the-Month Club have known about this stuff all along.

- Justin Fox is a Bloomberg View columnist writing about business.