There Is More to Behavioral Economics Than Biases and Fallacies

Industrial Management Consulting
Industrial Management Consulting

Compared to just a few years ago, the term behavioral economics has gained tremendous currency. To say it is on everyone’s lips would be only a minor exaggeration. For the scientists and practitioners in the field, this emergence from relative obscurity should, at first glance at least, be a source of happiness.

One reason for this growing interest is the way behavioral economics has been presented and interpreted. Behavioral economics is, it seems, the field that confronts us with our deeply irrational selves. We are bamboozled by biases, fooled by fallacies, entrapped by errors, hoodwinked by heuristics, deluded by illusions.

(I am using behavioral economics as a catchall label. Behavioral and cognitive science has a wider scope, but much of it is concerned with how we make choices and decisions. That is both where the overlap with economics occurs and where its visible relevance to everyday life materializes.)

This is all very exciting, of course, and as a result we are knee-deep in articles and infographics that gleefully point out how flawed we really are. But is that really all there is to behavioral economics?

Behavioral economics emerged as a subfield of economics. Economists were discovering that people did not quite act and react like the consistently rational, self-interested, utility-maximizing agents in their neoclassical models. The deviations from the standard model had to be captured somehow, and psychology provided a basis for doing so. It is these deviations—or biases—that get the popular attention. That is, at best, a mixed blessing. To a worrying extent, biases have become the defining feature of behavioral economics.

This focus on biases is unhelpful in several ways. It fails to acknowledge that biases are broad tendencies, rather than fixed traits, and it oversimplifies the complexity of human behavior into an incoherent list of flaws. This leads to misguided applications of behavioral science that have little or no effect, or which can backfire spectacularly. We need to appreciate better the role biases play on the wider behavioral-economics stage.

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