How to move behavioral economics forward with federalism

By Phil Armour

When social and natural scientists run an experiment on say, a college campus, there is always a concern that the results will not extend beyond the lab’s walls. External validity, as researchers call it, is a particularly thorny problem in behavioral economics, and has perhaps been the biggest stumbling block to wider acceptance in the economics community. In particular, economists debate the relevance of laboratory results in a broader, market-based context. Natural and randomized field experiments are often lauded as possessing strong evidence of an effect, but some economists have criticized the ability of policymakers to extrapolate beyond the idiosyncratic circumstances of these often tiny and localized experiments.

To move the discussion forward as to policy implications of behavioral economics, these laboratory results need to be tested on a real world level, out from under the parochial circumstances of college sophomores. Nudges, in other words, need to be implemented and evaluated in a different laboratory. Conveniently, in the United States, there are 50 ready-made laboratories, also known as states. Nearly as important as the aim of the nudge itself is the design of its implementation, which would preferably be in randomized, evaluation-ready experiments. They would be large enough to satisfy concerns over general applicability, while small enough to minimize downside risk from possible failure. Take two examples from Nudge:

  1. Application of RECAP (for those new to the blog/book, “Record, Evaluate, and Compare Alternative Prices” information provision schemes) to a class of loans, for example credit card loans, with treatment and control groups for evaluation on a nationwide basis.
  2. Replacement of the current practice of random assignment of “dual eligibles” in Medicare Part D with informed assignment in neighboring Part D plan areas

These small scale implementations allow for a second test: The fallibility of policymakers. One particular criticism of libertarian paternalism is simultaneously suspicious of the findings of human irrationality and doubtful about the ability of policymakers to overcome these findings, if they are indeed true. If well-designed, choice-preserving, government-implemented nudges produce favorable results on this smaller-scale, then these concerns may be largely allayed as wider implementation is considered. Then again, if they fail, then the community of libertarian and asymmetric paternalists, myself included, should take another look at what we thought we knew.

A call for data moves libertarian paternalism out of the abstract, making it easier to evaluate as a proposal or doctrine. Simply put, the economic debate on the use of behavioral economics in policy is ridden with ideological tendencies; bringing policymakers to the process of finding and implementing sound nudges on a somewhat larger scale allows the evidence to catch up to the argument. Psychologists and behavioral scientists helped put behavioral economics on the beach; it may require the politicians to help take it from there.

2 Responses to “How to move behavioral economics forward with federalism”

  1. Libertarian Paternalist Says:

    I now live in the US but lived most of my life in the country of extreme paternalism, Sweden. All choices have virtually been eradicated as comes to health care, education, welfare etc. The taxes are so high as to make further choices very limited.

    My ex wife is a behavioral psychologist. The hard core type as well as being a rational economist. To me Behavioral Economics and asymmetric paternalism seems on the face of it to be good. However as my ex wife points out from her experience with US psychology education, you cannot draw any wider conclusions from nor in fact even write a paper on 4 students/4 drivers on campus bahavior.

    I also read the Undercover Economist, in it a test was done to in real life test the findings of Behavioral Economics, the effect of Nudging existed but over time went away. So it seems that the ratioal economics of Gary Becker trumps nudging

    I also find real life experiments worrisome since I know for a fact that once somethings been implemented, it will not be taken away if results are poor or even if it is supposed to be temporary or evaluated. The VAT in Sweden was a war time measure between 1939-1945 and is now permanent at 25 %. The Swedish PPM, premium pension, selection was a success but imperfect, it is now extremely difficult to change. (It is my main area of expertise, making choice architecture for rational fund selection)

    Social experiments are always dangerous and social engineering in particular. I should know since I have lived in the most disastrously social engineered country in the world, hard work, the will to succeed and self reliance has been bred out of the Swede. Instead we now have the Nanny state.

    But I prefer soft paternalism in contrast to hard paternalism but I do not want to see more paternalism i.e soft paternalism on top of hard paternalism.

    I wish to see hard paternalism eradicated and exchanged for soft paternalism. Therefore I am a proponent of Nudging but I have a very strong suspicion that those that today hail soft paternalism as the savior in reality only wants more paternalism. They want to restrict more choices not to expand and to do choice architecture on all.

  2. Phil Armour Says:

    I’m not unsympathetic to your perspective, and I do believe that hard paternalism tends to run off the rails, but note that the suggestions I gave were ways of modifying already existent policies. The government has already recognized the need to enact laws protecting consumers from lenders and has decided to enroll the elderly/indigent in prescription drug plans. The suggestion is to make these attempts effective by injecting psychologically friendly aspects to their policies, and to test this effectiveness by making these modified policies evaluation-ready.

    I don’t know which test you’re speaking to in particular from The Undercover Economist, but one of the most widely cited studies is that of John List and Uri Gneezy concerning gift exchange. They indeed found that results from laboratory experiments did not persist in their field study over the course of a workday. However, to say that we should reject behavioral economics in favor of Becker-style economics is a premature (and rather sizable) conclusion to make given the results of a single study that is far too narrow in its circumstances (students working for a day in data entry or donation gathering).

    The point is that we need broader tests to satisfy these debates, and I don’t think that focusing on modifying extant policies in selective, partial ways will lead to disastrous social engineering. But that’s just me…

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