Introduction – Behavioral Economics: An Exercise in Design and Humility
It is tempting to look at people in general and imagine a large body of reasonable and rational individuals out there, going about their lives in a reasoned, calculated and sensible way. Of course, this view is somewhat correct. Our minds and bodies are capable of amazing acts. We can see a ball thrown from a distance, instantly calculate its trajectory and impact, and then move our body and hands in order to catch it. We can learn new languages with ease, particularly as young children. We can master chess. We can recognize thousands of faces without confusing them (although as I get older I am less and less impressed with my own memory). We can produce music, literature, technology, and art—the list goes on and on.
As Shakespeare expressed in Hamlet:
“What a piece of work is a man! How noble in reason, how infinite in faculty! In form and moving how express and admirable! In action how like an Angel! In apprehension how like a god! The beauty of the world! The paragon of animals!”
The problem is that while this view of human nature is largely shared by economists, policy makers, and most of the general population, it is not perfectly accurate. Sure we can do many great things, but we also fail from time to time, and the costs of these failings can be substantial. Think for example about something like texting and driving: You don’t have to text and drive all the time for it to be dangerous and devastating. Even if we text and drive once in awhile, let’s say only 3% of the time, it can still injure or kill us and the people around us.
Texting and driving is a substantial problem, but it is also a useful metaphor to help us think about some of the ways in which we misbehave — acting in ways that are inconsistent with our long-term interests. Overeating, under-saving, crimes of passion, the list goes on and on. The big problem is that our ability to act in our long-term interest is only getting more and more difficult! Why? Because the way we design the world around us does not help us fight temptation and think long-term. In fact, if an alien would observe the way we design the world, the only sensible conclusion he could come to is that human beings are determined to design the world in a way that creates more and more temptations and makes us think more and more myopically. Think about it, will the next version of the doughnut (doughnut 2.0) be more tempting or less tempting? Will the next version of the smartphone get us to check it more or less throughout the day? And will the next version of Facebook make us check Facebook more or less frequently?
Basically, we can think about life as a tug-of-war. We are walking around with our wallets, our priorities and our thoughts — and the commercial world around us wants our money, time, and attention. Does the commercial world want our money time and attention at some time in the far future? Is it trying to maximize our wellbeing in 30 or 40 years from now? No. The commercial actors around us want our money, time, and attention now. And they are rather successful in their mission — partially because they control the environment in which we live (supermarkets, malls), partially because we allow them into our computers and phones (apps, advertising), partially because they know more about what tempts us than we know, and partially because we don’t really understand some of the most basic aspects of our nature.
An important and rather depressing study by Ralph Keeney (a fellow researcher at Duke) explored the overarching impact of bad decision-making on our lives, or more accurately, our deaths. Using mortality data from the Center for Disease Control, Ralph estimated that about half of all deaths among adults 15-64 years old in the United States are caused or aided by bad personal decisions, particularly those relating to smoking, not exercising, criminality, drug and alcohol use, and unsafe sexual behavior.
Ralph carefully defined both the nature of personal decision and what can be considered premature death. For instance, if someone died after being broadsided by a drunk driver, it was not considered premature because the deceased did not make the decision that led to their death. However, if the drunk driver died then it was considered as a premature death because the decision to drive drunk, and dying as a result, are clearly connected. With this in mind we can examine a variety of instances where multiple decision paths are available (the drunk driver also has the option to take a cab, ride with a designated driver, or call a friend), and where these other decision paths are not chosen despite the fact that they are less likely to result in the same negative outcome (i.e., fatality).
To elaborate just a bit on just one example of a personal decision that can lead to death, let’s examine the overconsumption of alcohol. This decision can lead to weight gain, which can lead to obesity, which can cause heart attacks, strokes, cancer, and other fatal health problems. It can also result in accidental injury, which, in some cases can be fatal to the person drinking. Drinking alcohol can also lead to having unprotected sex, which can result in the contraction of a fatal disease. It can also, though less common, result in suicidal behavior. And these are just a few of the ways that the decision to drink alcohol can be fatal. There are plenty of other potential consequences. Of course, overconsumption of alcohol is just one example of how bad decisions can lead to premature death, and sadly as society moves forward, the number and types of bad decisions increases, as does the number of their potential negative consequences.
Now, if people were simply perfectly rational creatures, life would be wonderful and simple. We would just have to give people the information they need to make good decisions, and they would immediately make the right decisions. People eat too much? Just give them calorie information and all will be well. People don’t save, just give them a retirement calculator and they will start saving at the appropriate rate. People text and drive? Just let them know how dangerous it is. Kids drop out of school, doctors don’t wash their hands before checking their patients. Just explain to the kids why they should stay in school and tell the doctors why they should wash their hands. Sadly, life is not that simple and most of the problems we have in modern life are not due to lack of information, which is why our repeated attempts to improve behavior by providing additional information does little (at best) to make things better.
This is the basic problem: we have our internal software and hardware that has been developing over the years to deal with the world. And while we have some tremendous abilities, there are many cases in which these skills and abilities