In: Uncategorized

21 Jul 2008

The following comment by me from Fund Strategy looks at how ideas from behavioural finance are being used to influence individual behaviour. It is written for a financial readership.

Last week’s oddest spectacle was probably Richard Thaler, a professor of economics at the University of Chicago, talking about knife crime on the BBC Newsnight programme. Thaler probably knows as much about knives as the average street fighter knows about Sharpe ratios. Yet the venerable professor was expected to speak with authority on the recent spate of teenage stabbings in Britain.

To anyone familiar with Thaler’s work, this is a strange development. He was until recently well known within the economics profession as an expert in behavioural finance – writing technical papers on the relationship of human psychology to the financial markets. But recently he has metamorphosed into a policy guru.

This has come about because Thaler has applied what he has learned about individual decision making – what he calls “choice architecture” – to areas outside finance. Nudge, his book on the subject, co-written with Cass Sunstein of the University of Chicago Law School, has caught the imagination of policy-makers. David Cameron has embraced him as a guru in Britain, while in America he has influenced Barack Obama.

There are many serious examples in Nudge but Thaler’s favourite involves public urinals. Evidently, putting a picture of a fly in the urinal reduces spillage as it gives men something to aim at. For Thaler this is a fine example of how small measures can influence individual behaviour for the good.

Unfortunately, few have drawn attention to the problems with this approach. Most clearly, it reduces politics to a debate about how to control individual behaviour. Politics used to be about competing visions of how to organise society. Nowadays, it seems to be about such things as discouraging smoking and encouraging us to urinate in the right way.

It also means that bigger problems are seen in an exceedingly narrow way. For instance, climate change is viewed as a problem of behaviour that can ultimately only be dealt with by discouraging consumption. Discussions of developing new forms of technology or the need to increase the supply of energy are marginalised.

Ultimately, it suggests that the trendy area of behavioural economics is itself flawed. It views economics as primarily to do with individual behaviour and neglects the complex web of social relationships that make up the contemporary economy.

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