In our previous post, we included several links describing Richard Thaler’s major contributions to economics, finance, law, and other fields. (Thaler was awarded a “Nobel Prize” in economics earlier this week.) Rather than engaging in hero-worship or the usual congratulatory blather, we will instead use this post to offer two friendly criticisms of Thaler’s behavioral approach to economics. 

First off, although Thaler and his many behavioral disciples are right to point out the many, many ways in which human behavior deviates from perfect rationality (see image below for a sampling of these quirks), upon closer inspection it turns out that many of these deviations from rationality run in opposing directions! By way of example, behavioralists like to point out how people tend to be overly optimistic, systemmatically underestimating significant risks (such as texting while driving), but at the same time, behavioralists have also shown that people tend to overestimate very small risks (such as the risk of a mass shooting or an act of terrorism). The problem, however, is that these tendencies or heuristics run in different directions. When two heuristics collide with each other, which one prevails, or do they just end up cancelling each other out?

Another critique we have of behavioralists is their implicit elitism or “expert bias.” Specifically, when behavioralists are busy designing new public policies to promote retirement savings or incentivize organ donations (their favorite, well-worn examples), they often assume a condescending “we know best” attitude about people’s preferences. But beyond these low-hanging fruit, people’s policy preferences are not always homogenous. So, instead of ignoring or discounting our heterogeneous preferences, behavioralists should concede that their psychological models and preferred policies might have many shortcomings …