Behavioral economics invades London, at least one economist resists
September 19, 2010
Here is good news to all those who oppose a lemmings approach to markets. A recent article by economist Paul Omerod in the Financial Times makes two interesting points about behavioral economics.
The first point is that the craze has crossed the Atlantic and now rules London.
The coalition government has talked up the benefits of behavioural economics. Early on it promised to shun “the bureaucratic levers of the past” and help “people to make better choices”. More recently a Downing Street “nudge unit” has been set up to examine how better information can change behaviour, and the economist Richard Thaler (who co-wrote the book Nudge) flew in last week to launch it.
The second and most important one is that behavioral economics offers a limited account of economic problems. It needs, according to Omerod, to be augmented by an understanding of social networks:
The government needs to show far more imagination. In particular, it must recognise how social networks can unlock the power of behavioural policy. Both mainstream and behavioural economics mistakenly assume that we act as autonomous individuals. But we do not: we are hugely influenced by the actions of others. The implications of this insight can be dramatic, with small initial changes delivering large final outcomes.
With David Stark, I have written at length on the limitations of a behavioral approach to markets. But for now, I’d like to take my hat off to an economist who demonstrates judgment. That’s is, who is humble enough to see the limits of his discipline — while wise enough to understand that the current alternative, behavioral economics, is just as limited.
My comeback to Omeron is, of course, that sociologists are beyond the point of explaining everything with recourse to social networks. As proponents of the social studies of finance know well, providing markets devices that make possible better forms of rough calculation (a socio-technical approach) is bound to be as beneficial as understanding how decision-making is embedded rather than purely individual.