Monday, May 25, 2015

The Limited Political Implications of Behavioral Economics

A recent post on Marginal Revolution contends that progressives use findings from behavioral economics to support the economic policies they favor, while ignoring the implications that support conservative policies. The short post, originally a comment by blogger and computational biologist Luis Pedro Coelho, is perhaps intentionally controversial, arguing that loss aversion is a case against redistributive policies and social mobility:
"Taking from the higher-incomes to give it to the lower incomes may be negative utility as the higher incomes are valuing their loss at an exaggerated rate (it’s a loss), while the lower income recipients under value it... 
...if your utility function is heavily rank-based (a standard left-wing view) and you accept loss-aversion from the behavioral literature, then social mobility is suspect from an utility point-of-view."
Tyler Cowen made a similar point a few years ago, arguing that "For a given level of income, if some are moving up others are moving down... More upward — and thus downward — relative mobility probably means less aggregate happiness, due to habit formation and frame of reference effects."

I don't think loss aversion, habit formation, and the like make a strong case against (or for) redistribution or social mobility, but I do think Coelho has a point that economists need to watch out for our own confirmation bias when we go pointing out other behavioral biases to support our favorite policies. Simply appealing to behavioral economics, in general, or to loss aversion or any number of documented decision-making biases, rarely makes a strong case for or against broad policy aims or strategies. The reason is best summarized by Wolfgang Pesendorfer in "Behavioral Economics Comes of Age":
Behavioral economics argues that economists ignore important variables that affect behavior. The new variables are typically shown to affect decisions in experimental settings. For economists, the difficulty is that these new variables may be unobservable or even difficult to define in economic settings with economic data. From the perspective of an economist, the unobservable variable amounts to a free parameter in the utility function. Having too many such parameters already, the economist finds it difficult to utilize the experimental finding.
All economic models require making drastic simplifications of reality. Whether they can say anything useful depends on how well they can capture those aspects of reality that are relevant to the question at hand and leave out those that aren't. Behavioral economics has done a good job of pointing out some aspects of reality that standard models leave out, but not always of telling us exactly when these are more relevant than dozens of other aspects of reality we also leave out without second thought. For example, "default bias" seems to be a hugely important factor in retirement savings, so it should definitely be a consideration in the design of very narrow policies regarding 401(K) plan participation, but that does not mean we need to also include it in every macroeconomic model.

17 comments:

  1. Their loss aversion point is nothing compared to decreasing marginal utility, and way more people. If you shift $98 billion from the Koch brothers leaving them with just a mere $1 billion each, is this loss to them in utility, even including loss aversion, anything compared to the gain to giving close to a 1 million of the poorest people $100,000, or spending that $100,000/each on Heckman-style early human development, and other investments, in their children.

    But a big point too is future generations. If there is some loss aversion to breaking incredible income inequality, it's a one-time loss aversion, and then all future generations don't have to suffer the same horrendous income inequality. I'm sure there was a lot of loss aversion to King George and his court when the United States freed itself from England, but I think that was just a little outweighed by the benefits to the colonists and all of their descendants.

    ReplyDelete
  2. NIce information shared by you sir.

    ReplyDelete
  3. NIce information shared by you sir.

    ReplyDelete
  4. Ihnen allen vielen Dank dafur, dass Sie diesen glücklichen Tag mit uns teilen. Friv Gogy Games wir danken euch fur das bisherige Teilnehmen lassen, mochten aber den Rundbrief nicht mehr erhalten Friv Friv4school Friv Ich mochte Kommissar Fischler fur seine Freimutigkeit und Offenheit danken, Gogy Games Juegos Gogy Juegos Twizy Zox1 n der er uns jeden unternommenen Schritt erläutert und die verschiedenen vom Wissenschaftlichen Lenkungsausschu.

    ReplyDelete
  5. Despite political differences, I support the government's economic policy that will enable our country's economy to end rising unemployment. Assignment Writing Service

    ReplyDelete
  6. This is my first time i visit here. I found so many entertaining stuff in your blog, especially its discussion about Top Dissertation Writing Services. From the tons of comments on your articles

    ReplyDelete
  7. I’m impressed, I must say. I’m here for the first time. Superb! I simply must tell you that I really love your blogs page. My boyfriend enjoys your blogs.

    카지노사이트
    야한동영상
    휴게텔
    외국인출장
    마사지

    ReplyDelete
  8. It's late finding this act. At least, it's a thing to be familiar with that there are such events exist. I agree with your Blog and I will be back to inspect it more in the future so please keep up your act. Feel free to visit my website;
    야설

    ReplyDelete
  9. Great post! I am actually getting ready to across this information, is very helpful my friend. Also great blog here with all of the valuable information you have. Keep up the good work you are doing here. Feel free to visit my website;
    한국야동


    ReplyDelete
  10. It’s always a pleasure to read your magnificent articles on this site. You are among the top writers of this generation, and there’s nothing you can do that will change my opinion on that. My friends will soon realize how good you are. Feel free to visit my website; 일본야동

    ReplyDelete
  11. Aprecio personalmente su trabajo. Soy bastante nuevo en este campo. Y quiero agradecerle la gran información... Por favor, añade más correo.


    https://www.totosafeguide.com

    ReplyDelete
  12. Terima kasih sudah berbagi info. Saya sangat menghargai usaha Anda dan saya menunggu posting berikutnya terima kasih sekali lagi. 토토사이트

    ReplyDelete
  13. In any case I will be subscribing to your feed and I hope you write again very soon!

    ReplyDelete
  14. I definitely loved every little bit of it.

    ReplyDelete
  15. I’ve got you saved as a favorite to look at new stuff you post…

    ReplyDelete
  16. You completed a number of fine points there.

    ReplyDelete

Comments appreciated!