On markets, voters & behavioral economics

A couple new books are looking at behavioral economics and challenging the received wisdom of the market in ways that may actually break into our popular consciousness.

The Boston Globe:

Near the beginning of “The Hidden Persuaders” (1957), Vance Packard quoted from Advertising Age magazine the first principle of the new science of motivation research: “In very few instances do people really know what they want, even when they say they do.” Fifty years later, this astounding revelation has begun to penetrate mainstream economic theory. Better late than never.

American political ideology since around 1980 can pretty much be summed up in four words: markets good, government bad. Unregulated competition, in this view, is optimally efficient; governments need only enforce contracts, tend to national security, and then step out of the way. Neoclassical economics demonstrates with mathematical elegance that, if not interfered with, supply and demand, production and consumption, will glide smoothly toward a stable equilibrium.

But any proof is only as good as the assumptions it rests on. According to conventional economics and political science, consumers and voters can be counted on to make rational choices. “The assumption that we are rational,” writes MIT economics professor Dan Ariely, “implies that in everyday life, we compute the value of all the options we face and then follow the best possible path.” It also implies that we have sufficient information to make a wise decision, and that the context in which we decide doesn’t matter – deciders are always calm and objective. It implies, as incoming Harvard law professor Cass Sunstein and University of Chicago economist Richard Thaler put it, that we are “Econs” rather than “Humans.”

We’re not, of course, as wise humans (and wily advertisers) have always known. A new sub-discipline called “behavioral economics” has begun to quantify this perennial intuition and assess its implications. Two engaging, enlightening new books divide these tasks. “Predictably Irrational” [link] describes some of the research leading economists to modify many standard assumptions. “Nudge” [link] turns these insights to account, suggesting improved strategies for individual decision-making and public policy.

Yes, and what I wonder is, once we make it through the market part, maybe can we move on to voter behavior?

For just one example, Sunstein notes that whoever gets the top spot on the ballot is given an inherent percentage edge over all others. Voters tend to vote for the person in that spot on the ballot more than any other for no other reason than placement. I’d think we ought address that. And that’s only the beginning.


On Ariely:

On Sunstein:

  • bellisaurius

    t should be noted that books like predictably irrational, freakonomics, the undercover economist, et al don’t poo-poo markets, but rather seem like relativity vis a vis newtonian physics, they enhance the view of it.

    Most of them appreciate markets because the price is an indicator of truth in people’s desires; generally, this works well, except for a few apparently hardwired issues inside our cognitive box, like biases and preferences.

  • runasim

    Since markets are determined by human nature and behavior, they are dependent on human behavior. It seems ludicorus to me, that they are treated with such reverence, as if they were some miracle machine that can solve all problems.
    Markets, like trade since time immmemmorial , simply are.
    They have a potential for both good and bad effects, like any other human activity, and .the ‘truth’ of what custmers want can either cure or kill or both.,