The Right Coast

January 14, 2005
Behavioral Economic Bias
By Mike Rappaport

Behavorial economics is a part of economics that focuses on economically nonrational behavior. Sadly, though, it is applied in a biased manner. Practioners of the discipline are quick to note problems with how market participants behave, seldom realizing that the same points (sometimes with even greater force) apply to government actors.

Tyler Cowan, who appreciates these points, presents a short research agenda for a less biased version of behavorial economics:

I would like to see more behavioral investigations along the following lines:

1. A productive entrepreneur exploits behavioral imperfections to defeat a blocking coalition.

2. A market that would otherwise have no equilibrium "core" in fact becomes quite stable, due to behavioral frictions.

3. A politician self-deceives and builds a self-aggrandizing "empire" rather than serving the median voter. Voters know that the potential political competitors will end up doing the same, and so they accept this tendency.

4. Median voters pick politicians on the basis of looks, height, or behavioral quirks, not expected policy or past performance.

5. Behavioral models often stress how choices can make people worse off. How about a model where welfare payments lead to a breakdown in self-restraint and community?