foundation recently announced the winners of its annual fellowship awards
– commonly know as Genius grants. Matthew Rabin, a professor of economics
at the University of California, Berkeley was one of this year’s recipients.
Along with the title “Genius” the fellowship carries an award of $500,000
over 5 years.
Rabin’s work has
been in an emerging sub-field called behavioral economics, which aims,
in part, to bridge the gap between psychology and economics.
From the MacArthur
“Rabin is a pioneer
in behavioral economics, a field that applies such psychological insights
as fairness, impulsiveness, biases, and risk aversion to economic theory
and research. He is credited with influencing the practice of economics
by seamlessly integrating psychology and economics, freeing economists
to talk with new perspectives on such phenomena as group behavior and addiction.
Rabin has demonstrated particular strength in distilling from psychological
research those insights that can be modeled mathematically.”
If you force most
economists to define economics, they will mumble something half-heartedly
about the “study of the allocation of resources under scarcity”. But if
you ask them what economics is really about, then you will see the
spark in their eye and you will hear that economics is about trading systems,
auctions, markets, strategic interactions, policy, etc., but also, and
more fundamentally, economics is about people and human decision-making
in complex systems.
It is the social
part of the science that intrigues most of us, and as such, economics is
about human behavior. Ok then, so why is “behavioral economics” not redundant?
The problem is
that economics is a science not just about peoples behavior, but it is
also and about their interactions in a dynamic and complex environment.
So, it is not enough to explain how people behave, we must then take that
description and find the implications of that behavior on things like market
prices, interest rates, capital gains taxes, savings rates, school funding,
and a thousand other areas.
To do this, we
start (or we at least try to) with a description of human behavior and
work up to find implications for these various areas. However, as anyone
who’s had an intermediate economics course in college knows, this isn’t
easy. Even with a very simple description of human behavior, the results
are not easy to find.
So, in order to
get anywhere, economics researchers and theorists are often restricted
to looking at very simple descriptions of human behavior – usually something
that gets described as “rational behavior”. Of course, this over-simplification
can leave a bitter taste in one’s mouth – people often do weird, stupid,
or generally non-rational things – but absent any definitive description
of how people do behave in every circumstance, it must often suffice.
Those in the field
of “behavioral economics” have taken up the challenge of introducing less-simplistic,
and hopefully more realistic, models of economic behavior into their theories.
As a result, finding the economic implications becomes get even harder
than it already was.* Have doubts? See Rabin’s paper “Incorporating Fairness
into Game Theory and Economics,” American Economic Review 83, 1281-1302,
December 1993. A great paper, but not exactly beach reading.
The payoff from
this extra work, hopefully, is that we will eventually wind up with better
theories, a better understanding of economic phenomenon, better economic
predictions, and ultimately better policies.
Luckily we are
now, officially, one genius closer to that end.
(*I don’t mean
to imply that more conventional economists are in any way lazy for sticking
to traditional assumptions: it is often unclear whether behavior is closer
to the traditional rationality simplification or to the particular non-traditional
simplification under investigation. In any case, it is probably useful
to at least have an idea about what the outcome would be if people were
fully rational to use as a kind of benchmark.)