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Move Over Economists: We Need a Council of Psychological Advisers Move Over Economists: We Need a Council of Psychological Advisers

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Politics / OPINION

Move Over Economists: We Need a Council of Psychological Advisers

November 12, 2012

Though President Obama won reelection decisively, he won't have much time to celebrate. Many of the nation's problems -- stimulating employment, reducing the deficit, controlling health care costs, and improving the quality of education -- are very serious, and some of them must be addressed with great urgency. And none of these problems can be addressed simply by waving a magic government wand. To a significant degree, they all involve understanding what motivates current practices -- of business-people, financiers, doctors, patients, teachers, students -- and what levers we may be able to use to change those practices.



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Historically, when the need has arisen to change behavior, political leaders have turned to economists. That's one reason why presidents have a Council of Economic Advisers. When economists speak, presidents listen. And when economists have the president's ear, all their whispers are predicated on a set of assumptions about human behavior. Whether it's increasing gross domestic product, reducing unemployment, sustaining Social Security, making sure people are financially prepared for retirement, or stabilizing the financial sector, economists commonly hold certain beliefs. They will for example argue that people are motivated by self-interest and are rational calculators of their interests, and that the most effective way to get people to change the way they behave is by creating the right material incentives.

 

Now, people are sometimes rational calculators, but often they are not. And self-interest and incentives certainly matter, but they aren't all that matters. The perspective of economists is importantly incomplete, sometimes even misguided.

That's why we need psychologists whispering in the president's other ear -- about the economy, but also about education, health care, and more. The United States needs a Council of Psychological Advisers -- a new body that would parallel and complement the Council of Economic Advisers -- to bring actual experts on human behavior into the most senior levels of conversation about how to change it.

IRRATIONAL EXUBERANCE AND NEGATIVE EXPECTATIONS

Let's start by looking at the economy. Where did our financial institutions go wrong? And why did things get so out of hand? Why was there a housing "bubble"?

Somehow, "irrational exuberance" (as described by Robert Schiller) or "animal spirits" (as John Maynard Keynes dubbed them) overwhelmed rational calculations of risk and reward. These terms give the impression that a wild card or a joker -- something completely unpredictable and capricious -- thrusts itself into an otherwise perfectly rational system, and all hell breaks loose. Well, "irrational exuberance" and "animal spirits" are just sexy phrases for psychology, and psychologists have a good deal to say about both the causes and the consequences of these forces.

Economists offer little that helps us understand why bubbles occur or how they might be prevented. They also have little to tell us about how to prevent a "downward spiral of negative expectations" that makes fear of an economic downturn self-fulfilling.

Economists largely make assumptions about the rationality of human decision-making and proceed from there. Witness former Fed chairman Alan Greenspan's admission that he was mistaken during his time at the Fed in assuming that markets operate rationally and efficiently. The recent financial crisis and its persistent aftermath make it clear that ignoring the real psychology of "irrational" enthusiasm (or pessimism) can be perilous.

A Council of Psychological Advisers could help. This is not to say that macroeconomic variables don't matter and that the behavior of the economy is completely driven by the psychology of participants. Of course macroeconomic variables matter. But they are not, and never have been all that matters.

SAVINGS

And aside from the acute economic crisis of the last few years, what about the looming crisis that millions of baby boomers are entering retirement age with no pensions and accumulated savings, including 401(k)s, of less than $50,000? A rational decision maker would have been saving for retirement from day one, knowing that Social Security would never provide enough, even if it remains solvent. But for someone with knowledge of the psychological impediments to making near-term sacrifices in the service of future benefits, the inadequacy of American savings is hardly a surprise.

We can do more than smirk and finger-wag at our short-sighted peers. Thanks to research by several people -- Shlomo Benartzi, Richard Thaler, David Laibson, and Brigitte Madrian among them -- we now know how to increase dramatically the amount of money people save for their retirement. These researchers are all economists, by the way, but they are economists who appreciate the importance of psychology.

And what do you do when you want to get people to spend rather than save, as both Presidents George W. Bush and Obama did when they struggled to stimulate economic recovery with tax rebates? The rebates by themselves would put more money in people's pockets, but that wouldn't help unless they spent it. When people got rebates under  Bush, they got them in lump-sum checks, and estimates are that about 50 percent of that money was spent. When people got the Obama rebates, they came as small additions to each paycheck. A substantially higher proportion of the money was spent, making for a more effective stimulus, even as (or perhaps because) people were less aware they were getting more money back.

Again, knowledge of the psychology of economic decision-making leads you to expect just such an effect. Indeed, the Obama rebates were delivered in the way they were for just this reason; he had people with psychological sophistication whispering in his ear.

When it comes to public policy, economics sits atop the social sciences. Since virtually any policy you can think of involves spending money, the advice of economists is always solicited. But if they don't do an adequate job advising about the economy itself, you can be sure that they fall short advising on other matters.

TEACHING TO THE TEST VS. TEACHING CHARACTER

There has been much justified hand wringing about the state of American education. We have clearly lost our privileged position in the world. Improving education will require recruiting and retaining excellent teachers and finding ways to motivate students. How can this worthy goal be achieved? At the moment, we're pointing in the direction of school choice and competition to produce better schools, higher pay to produce better teachers, big tests to monitor student performance, and financial incentives to motivate students. A bunch of carrots and sticks.

Will these kinds of measures be enough? A recent National Research Council review of efforts throughout the U.S. to incentivize school performance concluded that the effects have been small or nonexistent, even when the incentives were substantial. And when big-test accountability does produce improvement in test scores, it is often as a result of teaching to the test or outright cheating. Research in psychology suggests that more important than pay (as long as it is adequate) are working conditions that allow teachers to be flexible, autonomous, and creative in their work with students, that provide them with mentoring, and that give teachers a sense that they are working in a community that has a common purpose.

From this perspective, the regimentation of instruction ushered in by big-test accountability is actually counterproductive. There is also growing evidence, some of it provided by psychologists Carol Dweck and Angela Duckworth, that the focus on beefing up the cognitive components of education that has dominated reform for the last 30 years may be misplaced. More important may be efforts to cultivate motivation and character (Paul Tough's remarkable new book, How Children Succeed, provides a vivid summary of this work). The importance of character and motivation suggests that the drill-and-test model of education that has become so common may actually be not just ineffective, but counterproductive.

A Council of Psychological Advisers could help inform the design of environments that will encourage students and teachers alike.

RISING HEALTH CARE COSTS, THANKS TO CHRONIC DISEASES

Everyone should have health insurance. This is a necessary, but not sufficient, goal for the maintenance of the health of the nation. But the cost of health care must also come down, lest it bankrupt the country. Computerized medical records that produce coordination of care will help bring down costs, but we also need to help patients (and their doctors) understand how to think about the efficacy and the risks involved in various medical procedures. There is plentiful evidence that patients make serious mistakes in thinking about risks and efficacy, and that their doctors make the very same mistakes, leading to costly but unnecessary procedures. Moreover, most medical care in a developed country like the U.S. involves management of chronic conditions (hypertension, heart disease, diabetes, asthma) rather than cure of acute diseases.

Managing these conditions effectively demands that patients be partners; they need to make lifestyle changes (e.g., diet, smoking, and exercise) that are often difficult to adhere to. A Council of Psychological Advisers can help in designing formats for presenting evidence about the efficacy and risks of various treatments that will reduce misunderstanding and thus reduce unnecessary procedures. And it can help develop interventions that will make patients health care partners more effective.

In a New Yorker article a few years ago, physician/author Atul Gawande described several programs in inner city clinics that dramatically reduced hospital admissions and improved patient health by employing life coaches who got to know patients and found ways to nudge their lifestyles in a healthier direction.

RESPONDING TO CLIMATE CHANGE

Traditional economic incentives like investment tax credits, energy taxes, and pollution credits might help us reduce our environmental footprint, but focusing exclusively on these neglects the extraordinary opportunity to call on citizens to do the right thing because it's the right thing. Indeed, there is even evidence that incentives can undermine people's desire to do the right thing. In a Swiss study of citizen willingness to have a nuclear waste dump located in their communities, researchers found that whereas 50 percent of citizens agreed (reluctantly) when no incentives were involved, only 25 percent agreed when substantial incentives were involved.

Each of us can take responsibility as citizens to contribute in small ways to solving the big environmental problems we face. As some citizens take responsibility, it makes others more likely to join in. Eventually a new social norm is created. And social norms can be more powerful than tax credits and penalties. Psychologist Robert Cialdani has provided several lovely demonstrations of techniques that encourage citizens to step up. A Council of Psychological Advisers can help in crafting appeals to citizens to do their duty.

LOOKING BEYOND GDP

Finally, let us ask the most fundamental question: What is public policy for? We aim to increase collective welfare, but just what does welfare consist of? For the most part, under the sway of economic thinking, our aim has been to make the country more prosperous -- to increase per-capita GDP. The appeal of this goal is twofold. First, we assume that if people are richer, they will be freer as individuals to choose the objects and activities that serve their welfare. We (the state and its technocrats) don't have to choose for them. So wealth serves as a proxy for everything else. And second, GDP can be measured. But it doesn't help much to pursue what you can measure if what you're measuring is the wrong thing. It doesn't help to get better at achieving goals if you're achieving the wrong goals. Fed Chairman Ben Bernanke said as much in a speech at a conference of economic researchers in Cambridge, Mass., on Aug. 6: "The ultimate purpose of economics, of course, is to understand and promote the enhancement of well-being. Economic measurement accordingly must encompass measures of well-being and its determinants."

Much research in the psychology of well-being suggests that some wealth-enhancing policies improve welfare, but others do not. Indeed, some of what it takes to get more prosperous may be counterproductive when it comes to well-being. A Council of Psychological Advisers can help here too, in the design of a system of national "psychological accounts" that does a better job of measuring well-being than per-capita GDP ever could.

I wish I could say that the U.S. would be leading the way if a Council of Psychological Advisers were created, but in fact, it would be following an enlightened trail already being blazed by others. The multinational Organization for Economic Cooperation and Development has been measuring quality of life for several years now. The French government, under former President Nicholas Sarkozy, issued a 300-page report three years ago on the limits of GDP as a measure of social welfare along with suggestions for how welfare measures can be improved. And in Great Britain, Prime Minister David Cameron has established a Behavioural Insights Team charged with formulating policy recommendations, based largely on psychological research, to help people make wiser decisions and live happier, healthier, more productive lives. And even these nations have been somewhat late to the game. Bhutan has been focused on measuring "gross national happiness" for 40 years, and has often chosen policies that promote well-being in preference to policies that would enhance GDP.

Many of us were cheered when President Obama was elected in 2008 that the Obama administration seemed marked by a renewed respect for knowledge and expertise. Whatever the politics of various policies might be, details of implementation were left not to political cronies, or to ideologues, but to people who actually have respect for evidence. I hope this respect for evidence and expertise will continue. But it needs to be the right evidence and expertise. A Council of Psychological Advisers is long overdue. This would be an excellent time to create one.

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