Behavioral economics insights

In Germany, about 12 percent of people consent to be organ donors; in Austria it’s 99.9 percent. This huge gap is the product not of “different cultures, different norms, or extraordinarily effective educational campaigns in Austria,” legal scholar Cass Sunstein wrote in a recent paper, but of a simple legal nudge. “In Austria, consent is presumed, subject to opt out. In Germany, consent is not presumed, and people have to opt in.”

This is an example of the remarkable power of defaults, one of the big discoveries of the behavioral-economics movement.

I went to a recent Brookings Institution conference on the public-policy lessons of behavioral economics. There were gee-whiz research findings and proposals, including from Harvard’s David Laibson, plus an account of how the lessons of behavioral economics are beginning to be put to use in government by the Social and Behavioral Sciences Team created by the White House in 2014. But an old critique – haven’t businesspeople known these things forever? – came up a few times too.

Just bringing insights about human behavior into government, even if they’re not new insights from the perspective of private industry, is progress. This is especially important because government policymakers have long listened to the advice of economists, and until recently the consensus among economists was that people generally made decisions rationally. Behavioral economics has changed that.

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But it’s still an interesting question: Have behavioral economists really discovered anything new, or have they simply replaced some wrong-headed notions of post-World War II economics with insights that people in business have understood for decades?

Laibson said he has tried to learn from advertisers and marketers, but mostly been disappointed. “I’ve actually been struck by how much they depend on intuitions,” he told Brookings research analyst Peter Olson.

So this is what behavioral economists do. They come up with theories for why people act in certain strange ways, they test those theories with experiments or against economic data, then publish the results so that the rest of us can learn from them.

That actually seems pretty useful, even if businesses have known about this stuff all along. •

Justin Fox is a Bloomberg View columnist.

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