Tuesday, July 6, 2010

Behavioral Economics: Much Promise But Still Far to Go

By Mark Solof

Insights from the new academic discipline of behavioral economics (BE) are finding their way into the work of experts in a host of fields who are searching for new approaches to age-old problems. New York Times columnists David Brooks and John Tierney have repeatedly used the insights as grist for their opinion mills. As highlighted in "Travelers Behaving Badly," experts in field of transportation are no exception.

Yet, in researching the article, what was surprising to me was the relative scarcity of practical, real world applications of the research findings. The website Nudges.org, launched as a follow-up to the bestselling Nudge book, is compiling many examples of behavioral nudges from readers around the world. But one really has to dig to find interventions that are making a difference – especially in the field of transportation. Mostly, it seems, research focuses on explaining behavior rather than on identifying measures to effectively change it.

This is perhaps understandable given the newness of the discipline. The field is rooted in so-called “prospect theory” developed by Amos Tversky and Daniel Kahneman which was first published in 1979. (Kahneman received a Nobel Prize for this work in 2002.) The first academic appointments of “behavioral economists” took place in the early 1990s. So there has been little time to flesh out real-world applications.

It’s also the case that, as "Travelers Behaving Badly" points out, some interventions for improving travel behavior are unwitting and as-yet-unrecognized applications of BE. That is, they are crafted independently by transportation planners and engineers based on their own intuitions about human nature. Identifying these “intuitive” interventions and drawing connections to BE is a potentially valuable undertaking, promising to facilitate adapting the interventions to similar circumstances or other fields. Nudges.org is making an important contribution in this regard but more extensive and systematic efforts by the research community appear warranted.

There is little doubt that bolstering BE research can have payoffs in terms of improving real-world decisions. Perhaps the most dramatic – and tragic – example of bad decisions brought about by the kind of behavioral biases investigated by BE involves the world’s worst aircraft crash in 1977 on the Canary Islands which killed 583 people. The pilot, previously considered one of the world’s foremost air safety experts, was influenced to rush his takeoff by a “loss aversion” reaction towards further delays, according to Ori and Rom Brafman’s Sway.

Recently, the behavioral tendency to underestimate risks was seen as one of the root causes of the gulf oil disaster. But discouraging bad behavior and its potentially disastrous consequences is not the only payoff of BE. Dan Ariely in his new book, The Upside of Irrationality, suggests that BE research can help encourage altruism and the best of human nature.

Look for the field of BE to continue to spawn bestselling books -- adding to the current shelf-full already published -- given the relevance of many BE insights for day-to-day decisions we all make. In years to come we’re likely to see increasingly powerful, and possibly revolutionary, findings as BE research is extended to draw upon investigations into how thought processes actually occur in the brain, as seen through functional magnetic resonance imaging and other techniques. The new field of “neuroeconomics” is focused on doing just that. In the future, we’ll all still be a bit crazy but at least we’ll better know how to better guard ourselves and others from the consequences.

Mark Solof is the director of public affairs at the North Jersey Transportation Planning Authority and the author of "Travelers Behaving Badly," which appears in the Spring/Summer 2010 issue of InTransition.

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