There’s an article in a recent Economist (Jan 16th) about this:
Thanks for the link. Thaler and Sunstein describe a similar strategy in Nudge, where someone got a reward which would be forfeit if he didn’t do something on time. I think it was finishing a paper; I have the book at home. That was anecdotal, though, this experiment is better.
Some of the comments demonstrate the resistance to these ideas. One person seemed to think that the difference was due to those getting a bonus at the end of the week worrying about the company going bankrupt in that time. Someone else didn’t seem to get that the bonus was the same in either case; yes bonuses are useful. A third person thought the strategy was awful because the person getting the bonus up front would fret more about losing it, when the level of risk was the same in both cases. So our OP is definitely not alone.
I’m curious as to why you think all of economics is “wrong” (real world examples welcome).
The assumption isn’t “all humans act in their own-self interest”. It is that taken as a whole, we can expect people to act in their own short term interest based on whatever information they have available and their own personal motivators. You can’t apply economic models to individuals. And you can’t just assume that what you believe to be the best course of action for humanity (or a smaller subset of) is what people will conclude is in their own interest. A minimum wage worker will often conclude that laws increasing minimum wage or joining a union is to their advangage because $6 an hour is better than $5. The long term unintended consequence that jobs may be harder to come by is to nebulous a concept, even if it is true.
I think the most common misconception is the failure to understand that economic forces do not give a shit about you any more than tidal forces or the wind does. That is to say, if the company you work for goes out of business or your job is outsourced, that is not a failure of economic theory any more than a safe landing on your head is a failure of the theory of gravity.
A good question to ask is how much government action is based on good economic theory and how much is based on populist appeasment?
I’d certainly like to see the interview, but it sounds similar to what I said in a thread I started a while ago. The notion that people will always work harder if they get paid more is one of those assumptions of economics that always seemed to me obviously false. Just because people are working and getting paid for it doesn’t mean that the pay is what’s primarily motivating them to do work. In some cases attempts to manipulate people by changing their salary can be distracting or insulting.
ITR said it, not me. 
I was just pointing out that he said people aren’t selfish, then turned around and gave an example of people acting selfishly and called it “too obvious”. I find that humorous.
“For example, there’s the assumptions that all humans act in their own-self interest, that more money and more goods always makes as happier, that doing more work makes us less happy, that we make choices of what to buy based on innate and interior preferences, etc… The problem is that none of these assumptions are true or close to true.”
“Freakonomics describes a study which proved that realtors devote more energy to selling their own homes than to selling their clients’ homes. This is supposed to “dazzle” me, according to the New York Times, but instead it just brought a shrug. Of course they do. Why wouldn’t they? Wouldn’t you do the same if you were a realtor?”
Please give a cite showing that this is a claim of economics. I learned that it is not true long before behavioral economics came around. The only claims I’ve seen for it come from those justifying obscenely high CEO salaries on the grounds that they just can’t get motivated if they make only $10 million, not $15 million.
Weren’t you just a few days ago lecturing me about how experiments are not a necessary part of scientific thinking and about how personal experience and common sense are just as valid and empirical as a way of garnering information about the world? Well, that’s exactly what I’m urging here, that we should have been willing to trust, the logical and straightforward thinking about economic topics, rather than bindly following the experts.
But again, we shouldn’t need research results to prove that unregulated banks able to make risky loans and bundle them into investment vehicles that nobody understood are bad news. That’s something that an ordinary person would have been able to explain 10 or 100 years ago. (That’s why economic deregulation generally occurred behind closed doors while the media instead focused on a semen-stained dress and the misbehavior of Brittany Spears.) Behavioral economists may be able to explain the economic crisis after it occurred, but what we need is an approach that recognizes bad decisions before they cause disasters.
It would be nice if the classical economists would listen to the behavioral economists. It would be much nicer if all economists might take a lesson from this incident, acknowledging that their ability to understand and control events. To judge by the article I read, it instead seems that they’re traveling in the opposite direction. They get 50 undergrads in a room playing a game where the payout is a few dollars and they think they’ve got a result that applies to all people, everywhere. The results of policy based on such things is likely to be as bad as the results of our previous economic policy.
Huh? My entire point is that there was no one respected in the field until recently saying Adam Smith was wrong. There were plenty of people not respected in the field saying that Adam Smith was wrong. Try reading my post and responding to what I say, if you wouldn’t mind.
No, I never said any such thing. I said that not all people act in their own self-interest all the time.
That’s not even close to accurate. The idea that money is a satisfier, not a motivator, is at least decades old. Hell, I’m a chemistry major and I’ve known that for thirty years. What econonomists are you reading that you think money is a motivator?
Here it is.
What it says is that you get worse performance when a large reward is dependent on that performance. So giving finance execs 50% or more of their compensation in performance bonuses is a bad idea for the company. However:
Here is another one from my Social Phych class last year: When trying to change attitudes, small rewards and punishments work better than large ones. If I pay you $1000 to give a speech promoting something you disagree with, you attitude towards that subject will likely not change. If I give you $5, and you still give the speech, you attitude towards the the subject will likely change. Likewise the weaker the punishment you can threaten someone with and actually get them to change behavior, the more likely they will stick with the new behavior if the punishment is no longer imminent.
Jonathan
Presumably, the difference is that now we’re measuring them. The Bible, Plato, and Aristotle, to use your examples, had some fairly impressive insights into reason, psychology, and humanity, but they also made numerous claims that, obvious as they were at the time, are just totally incorrect.
I’m not sure why you chose this as an example to support your claim. It doesn’t have anything to do with Behavioral Economics, as far as I can tell. The Principal-Agent problem can be handily derived from classical economics. It’s been a while since I read Freakonomics, but I don’t really remember much of that book that had to do with behavioral economics.
The point of Freakonomics was basically uncovering cases where the laws of unintended consequences apply. Will basing teacher’s pay on standardized testing improve student scores? Yes, but some of the improvement will be because teachers cheat. Will athletes throw games without being paid for it? Yes, if they can expect payment in-kind at a later point. etc.
Now, you’re a pretty smart guy, and you’re a regular in GD, so maybe you can see past the first-order approximation that leads to ill-conceived systems that ignore the unintended consequences, but surely you see that most people don’t. Maybe it didn’t dazzle you, but it was eye-opening to many. And even if you grasp these concept intuitively, there’s great value in actually measuring it experimentally to see how much of an effect it has.
Observation is a perfectly good way of collecting information, and of inspiring a hypothesis, but it takes an experiment to test a hypothesis. You don’t create hypotheses using a Mad Libs book.
Nobody consults behavioral economists on macro-economic issues. I basically agree with you on what made sense, but Greenspan did not. Remember, when some of the state attorney generals tried to put in regulations to stop high risk mortgages, Greenspan and the Fed did not only not help them but deliberately stopped them. Radical free market economics depends strongly on the supposed fact that every economic player can make rational decisions about things like mortgages, and if they do not then they are being greedy and deserve the consequences. Surely you’ve seen some people in this very forum be opposed to the FDA because they believe every person can make informed decisions about the risks of various drugs. I think we both agree that this is a bat-shit insane position, but it had become the dominant one for most of the first decade of this century. Many people have a hard time admitting that they might make a bad choice, so the position that government shouldn’t keep you from being fleeced had appeal.
Krugman’s article in the Times was basically an acknowledgment that he and economists in general blew it. Krugman, by the way, called the collapse of the housing bubble, and its consequences, a few years before it happened, and got roundly laughed at by the right. The ones refusing to admit a mistake are the ideologues whose theories, when implemented, led to this mess.
The interesting experiments, by the way, get replicated over and over again. I’m trying to apply some of these conclusions to real engineering issues, but I can only do it anecdotally at the moment. However fairly high level managers at major IC companies have bought into behavioral economics as a better explanation for how engineering decisions are made than traditional economics.
Sorry about that. I thought you were referring to non-mainstream economists, not people with an idealized and misty view of village life. I never could stand Chesterton anyway.