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.
Latest Politics Posts:
Loading feed...
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.
Leave A Comment