IT seems that every week a new book or major newspaper article appears showing that irrational decision-making helped cause the housing bubble or the rise in health care costs.
Such insights draw on behavioral economics, an increasingly popular field that incorporates elements from psychology to explain why people make seemingly irrational decisions, at least according to traditional economic theory and its emphasis on rational choice. Behavioral economics helps to explain why, for example, people under-save for retirement, why they eat too much and exercise too little and why they buy energy-inefficient light bulbs and appliances. And, by understanding the causes of these problems, behavioral economics has spawned a number of creative interventions to deal with them.
But the field has its limits. As policymakers use it to devise programs, it’s becoming clear that behavioral economics is being asked to solve problems it wasn’t meant to address. Indeed, it seems in some cases that behavioral economics is being used as a political expedient, allowing policymakers to avoid painful but more effective solutions rooted in traditional economics.
Take, for example, our nation’s obesity epidemic. The fashionable response, based on the belief that better information can lead to better behavior, is to influence consumers through things like calorie labeling — for instance, there’s a mandate in the health care reform act requiring restaurant chains to post the number of calories in their dishes.
Calorie labeling is a good thing; dieters should know more about the foods they are eating. But studies of New York City’s attempt at calorie posting have found that it has had little impact on dieters’ choices.
Obesity isn’t a result of a lack of information; instead, economists argue that rising levels of obesity can be traced to falling food prices, especially for unhealthy processed foods.
To combat the epidemic effectively, then, we need to change the relative price of healthful and unhealthful food — for example, we need to stop subsidizing corn, thereby raising the price of high fructose corn syrup used in sodas, and we also need to consider taxes on unhealthful foods. But because we lack the political will to change the price of junk food, we focus on consumer behavior.
Or take conflicts of interest in medicine. Despite volumes of research showing that pharmaceutical industry gifts distort decisions by doctors, the medical establishment has not mustered the will to bar such thinly disguised bribes, and the health care reform act fails to outlaw them. Instead, much like food labeling, the act includes “sunshine” provisionsthat will simply make information about these gifts available to the public. We have shifted the burden from industry, which has the power to change the way it does business, to the relatively uninformed and powerless consumer.
The same pattern can be seen in health care reform itself. The act promises to achieve the admirable goal of insuring most Americans, yet it fails to address the more fundamental problem of health care costs. Instead of requiring individuals to pay out of pocket if they choose to receive expensive and unproven interventions, the act tries to lower costs by promoting incentive programs that reward healthy behaviors.
Prevention is certainly a worthy goal; it is much better to prevent a case of lung cancer than to treat it. But efforts to improve public health, even if enhanced by insights from behavioral economics, are unlikely to have a major impact on health care costs. Studies show that preventive medicine, even when it works, rarely saves money.
Our over-reliance on behavioral economics is not limited to health care. A “gallons-per-mile” bill recently passed by the New York State Senate is intended to help drivers think more clearly about the fuel consumption of the vehicles they purchase; research has shown that gallons-per-mile is a more effective means of getting drivers to appreciate the realities of fuel consumption than the traditional miles-per-gallon.
But more and better information fails to get at the core of the problem: people drive large, energy-inefficient cars because gas is still relatively cheap. An increase in the gas tax that made the price of gas reflect its true costs would be a far more effective — though much more politically painful — way to reduce fuel consumption.
Similarly, Prime Minister David Cameron of Britain recently promoted behavioral economics as a remedy for his country’s over-use of electricity, citing what he claimed were remarkable results from a study that reduced household electricity use by informing consumers of how their use compared to that of their neighbors.
Under closer scrutiny, however, tests of the program found that better information reduced energy use by a mere 1 percent to 2.5 percent — modest relative to the hopes being pinned on it.
Compare that with the likely results of a solution rooted in traditional economics: a carbon tax would instantly bring the price of energy into line with its true cost and would unleash the creative power of the marketplace to generate cleaner energy sources.
Behavioral economics should complement, not substitute for, more substantive economic interventions. If traditional economics suggests that we should have a larger price difference between sugar-free and sugared drinks, behavioral economics could suggest whether consumers would respond better to a subsidy on unsweetened drinks or a tax on sugary drinks.
But that’s the most it can do. For all of its insights, behavioral economics alone is not a viable alternative to the kinds of far-reaching policies we need to tackle our nation’s challenges.
George Loewenstein is a professor of economics and psychology at Carnegie Mellon University. Peter Ubel is a professor of business and public policy at Duke and the author of "Free Market Madness: Why Human Nature Is at Odds With Economics."
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