Monday, March 11, 2013

Incentives and tricks

"But what Sunstein and Thaler say is that it's just easier to trick people than it is to change their incentives.... [M]y toolkit used to contain only incentives, but now tricks are in there, too."
Steven D Levitt, from an interview in Simon W, Bowmaker, The Art and Practice of Economics Research: Lessons from Leading Minds (Edward Elgar, 2012 ISBN: 978 1849808460) p. 237
Behavioral economics and the psychologists who inspired it may have introduced ways of tricking people into intellectual discourse but it is doubtful that they are discovering anything that has not been practiced by hucksters for generations. Their analysis of weaknesses in the ways people choose can be used in two ways.

First, it can help people manipulate others--to trick or nudge them. This can benefit those who are tricked if, as Levitt, Thaler, and Sunstein assume, the tricker is a benevolent paternalist preventing mistakes by an error-prone citizen or underling. Those who assume that even people in government are usually self-interested fear that the benefitting party will not be the one tricked, but rather the one who tricks. They worry that power combined with this knowledge creates temptation for abuse.

The second way to use the analysis of behavioral economics is not through manipulation but rather as a defense against manipulation.  If one understands the errors to which human decision-making is prone and how those errors can be exploited by others, one can attempt to correct for those errors and is less likely to be exploited.

Thaler and Sunstein do not use the word "trick." Instead they talk about "nudges," ways of framing choices so that people are more likely to make what Thaler and Sunstein consider good choices. Levitt has re-framed their message by using the word "trick," and their approach seems less desirable when it is seen as tricking people rather an as nudging them. Can the government of free and equal people be based on deception?

(Behavioral economics can be used to attack the notion of market efficiency. If people cannot be trusted to make rational choices, why should we want a system to responds to people's wants as markets tend to do? However, behavioral economics can just as easily be used to attack the underpinnings of democracy. If people can be easily tricked, why should we expect their political choices to result in good government? With or without behavioral economics, it is hard to make a convincing case that political processes have a greater tendency to self-correct than market processes.)

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