People often ask me how the policy prescriptions designed by behavioural economists differ from those done by mainstream economists. The video in this article can probably shed more light than I can do. At the heart of the differences between the two schools of thought are the fundamental differences in terms of the assumptions they make about how humans make decisions, and behave, therefore.
Bear in mind that the study of human decision making applies in all spheres of human life, provided there is a need to make a choice. This includes politics, eating & health lifestyles, saving & investment decisions – all the way up to effecting public policies that drive choices that ensure safety for all road users.
Mainstream economists assume that every choice that humans make is driven by rational tendencies. In other words, all observed choice decisions around us are an act of people making the best possible decisions.
In the case of the video in this article, the economics policy prescription to mitigating pedestrian accidents is something that must have a rational appeal, such as educating road users, putting warning sign posts, issuing fines and punishment (in order raise marginal cost of indecent road use over the marginal benefit of doing so).
Evidence however shows that global road related deaths are increasing even in countries with the best roads and better road education and campaigns. Mandates and penalties, as key economics levers for driving behaviour change not only fail to achieve desired goals but ignite resentment among citizens. They are unpopular politically.
Behavioural economists, on the other hand assume that much as humans may want to act or appear as though they are rational, more powerful forces driven by irrational tendencies often control their final behaviour. We don’t always act in our best interest – sometimes we overeat, we exercise too little, don’t save for retirement, even though we know it’s the rational thing to do.
As a practical field of economics, see at the end of the video how behavioural economists use optical illusions on pedestrian crossings in order to address accidents. This is called a ‘Nudge’, in the behavioural economics language. The insight is that humans have two brain systems – System 1 which is fast and automatic, and System 2 which is slow and reflective. By putting an unfamiliar 3D optical illusion, you help change the driver’s brain mode from System 1 to a more reflective System 2 mode, thereby improving judgement or choice.
A prescription of this nature would never be taught in economics because it goes against the assumption that humans are intelligent beings who always act rationally. In other words, economics models would predict that an intervention such as this one would have no impact as a policy intervention – but see the evidence. It is true that if you base your analysis on wrong assumptions, you’re likely to get it wrong even on your policy prescriptions.
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