Everyone is confused, at least according to Richard Thaler

The recent exchange between Peter Ubel and Richard Thaler acted as a welcome and helpful comment on a common lack of clarity around behavioural – economics, change, insight etc – terms; most obviously in Thaler’s frank assessment that:

the definition of behavioral economics has been abused. But you are very wrong to write in your post that behavioral economics is mostly psychology. It is mostly economics…The sad truth is that many behavioral economists know very little about psychology.

The exchange also acted as a reminder that the economist and recognised “genius”, Raj Chetty gave an extremely well received talk in January about Behavioural Economics and Public Policy in which he provided a refreshingly concise definition of behavioural economics:

Behavioral economics brings insights from psychology and other social sciences into economic models

On the face of it, someone like Chetty would seem to fit well with Thaler’s definition of a behavioural economist, even if he apparently identifies primarily as an economist.

Amongst many welcome features of the talk, Chetty adopted a “pragmatic perspective” and talked in specifics about what he saw as the key contributions of behavioural economics to public policy and some of the most promising, and increasingly familiar, “policy tools” available such as simplification, social comparisons and loss framing.

Arguably the most interesting part – amongst many - of the talk was the discussion of his work on the Earned Income Tax Credit (EITC), a kind of Working Tax Credit for the US.

The work suggests that some eligible individuals and families do not take advantage of the EITC but that this depends very much on geographical location.  Indeed, when those eligible but not taking advantage of the incentive move to “high knowledge” areas in which take-up is higher they start to report higher incomes. It makes Chetty’s hypothesis that some people simply don’t know about the EITC, and that this depends on where they live, seem pretty plausible.

This seems like a nice illustration of Kahneman’s point that “We are all Lewinians now, and in the context of policy behavioural economists are Lewinian as well.” Certainly, in the example of Chetty’s EITC work it would seem that a complete understanding of behaviour requires an appreciation of the individual, their environment and the interaction between the two. Incidentally, this comment is made in the same place as his suggestion that behavioural economics is not actually a good “common label” for behaviourally informed, policy-relevant work. Instead he opts for “applied behavioural science” – maybe not as catchy but arguably more helpful and clearer.

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