Behavioural Education Economics

The subject in Economics people most often ask me about is Behavioural Economics. This doesn’t surprise me: of all Economics’ sub-disciplines, Behavioural Economics is the one that seems to have most successfully captured the public imagination. What does surprise me, though, is how quickly this rise to prominence has come about. Just 50 years ago, the term ‘Behavioural Economics’ did not exist. To understand how Behavioural Economics went from non-existence to Economics’ sexiest topic, we must venture back to the subject’s beginning.

Rational Economic Man

Early political economists sought to understand human behaviour in a way that was scientific and generalisable. To do this, they needed a simplified and predictable unit of analysis. What they came up with was Rational Economic Man (REM) – a theoretical device that sought to distil human nature to its bare essentials. Human decision-making was reduced to two fundamental tenets: self-interest and rationality. Self-interest assumed people’s primary concern was maximising their own satisfaction or ‘utility’; rationality assumed that people were capable of pursuing this goal sensibly, via decisions that aligned to various axioms of rational choice.[1]

Figure 1: Rational Economic Man

Source: Kate Raworth, Doughnut Economics

REM proved extremely useful. His simplicity allowed Economists to build models that were generalisable and internally consistent. A uniform base unit also allowed them to model the economy from the ‘bottom-up’, in the same way that physicists could construct laws of motion from the atom. The rationality assumption seemed to describe an awful lot of human behaviour, including the near-ubiquitous negative relationship observed between price and demand. Even the self-interest assumption didn’t seem too restrictive – especially once one acknowledged that people could gain personal satisfaction from helping others.

When confronted with charges that he was unrealistic, defenders of REM typically pulled one of two cards from their sleeve. First, they argued that the more important the decision, the more the rationality assumption held, since people could not afford to behave irrationally. Second, when confronted with examples of human error, they could argue that these errors were largely random. As such, the ‘the pluses would cancel the minuses’ and mistakes could be safely ignored for general analysis.

The Undoing Project

In 1969, two Israeli psychologists met on a University campus. Their names were Daniel Kahneman and Amos Tversky.[2] They didn’t know it at the time, but together they would take a sledgehammer to the credibility of REM and set the stage for the founding of a new discipline: Behavioural Economics.

Through a series of experiments, Kahneman and Tversky showed that mistakes were not random, and that humans systematically and predictably deviated from textbook rational behaviour. The Dictator Game provides one famous example: in this experiment, Player A is given a sum of money – say £10 – and told to offer an amount to Player B. Player B can either agree to the offer – in which case both players get the agreed upon amount – or decline the offer – in which case both Players get nothing. What should Player B do? If fully rational, he should realise that if he rejects the offer he gets nothing, so he should accept any positive amount of money – even £0.01. Realising this, the equally rational Player A should offer as close to £10 as possible – say £9.99.

What do you think actually happens? Unsurprisingly, this prediction is not borne out in reality – the average offer is around £4 – though interestingly, as Figure 2 shows, this varies significantly amongst countries.

Figure 2: Player A Offers in the Dictator Game

Source: Henrich et al.

Behavioural Education Economics

Education Economics provides further nice examples of behavioural findings. By focusing on self-interest and rationality, REM leaves very little room for the roles of ideas, stereotypes, habits and emotion. In reality, these are all powerful motivators of human behaviour. For example, in India, low-caste boys were essentially just as good at solving puzzles as high-caste boys when caste identity was not revealed (see Figure 3). However, in mixed-caste groups, revealing the boys’ castes before a test caused low-caste boys to underperform high-caste boys by 23% (Hoff and Pandey). In a similar experiment, Shih et al. (1999) found that Asian-American women primed with their Asian identity produced superior performance on a math test, whereas participants primed with their female identity produced decreased performance, relative to women in control groups.

Figure 3: ‘Framing’ Effects on Academic Performance

Source: World Development Report 2015: Mind, Society and Behaviour

Role models provide another interesting example. In Uganda, students preparing for their national exams were randomly selected to watch the Queen of Katwe: the inspirational tale of a Ugandan slum-girl who went on to lead the Ugandan team at the Chess Olympiad. Students who watched this film performed significantly better in their exams than a control group who watched a non-inspirational film. REM cannot explain this - point to the need for richer and permissive models of human behaviour.

The Future of Behavioural Economics

So far, Behavioural Economics has proved extremely effective at identifying scenarios where the canonical model fails. However, Behavioural Economics needs to be more than just a collection of observations. Without an attempt to unify these under some general theory, the subject will remain unsatisfactory. I felt this when I took a Behavioural Economics course last year: by the end, I hadn’t learnt anything profound about the world that I couldn’t have learnt from just reading the abstracts of the required reading.

Generalising behavioural findings is obviously easier said than done, but I think there are two reasons for optimism. First, they do not have to reinvent the wheel entirely – they can borrow many ‘tools’ from the orthodox Economists’ toolkit, such as general equilibrium analysis. Second, it has some precedent – Kahneman & Tversky’s Prospect Theory provides a great example of a general theory of human behaviour gleaned from empirical findings. While Behavioural Economics may never come up with a model of behaviour as analytically convenient as REM, further attempts at generalisation can only enhance its credibility.

Word count: 1,000 words

References

• Henrich et al., ‘In Search of Homo Economicus: Behavioural Experiments in 15 Small-Scale Societies’
• Hoff and Pandey, ‘Belief Systems and Durable Inequalities: An Experimental Investigation of Indian Caste’
• Kahneman and Tversky, ‘Prospect Theory: An Analysis of Decision Under Risk’
• Riley, ‘Role Models in Movies: The Impact of Queen of Katwe on Students’ Educational Attainment’

If you are interested in Behavioural Economics in general, I would recommend ‘Misbehaving’ by Richard Thaler, ‘Thinking Fast and Slow’ by Daniel Kahneman, or the wonderful ‘The Undoing Project’ by Michael Lewis.

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[1] For those interested, these axioms are completeness (all choices can be compared); transitivity (if A > B and B > C, A > C) and continuity (if A > B, then situations suitably close to A must also > B)

[2] The title and opening sentences of this section are taken from Michael Lewis’ wonderful biography of the pair, which I implore you to read