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The limits of behavioral economics

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Sisyphus finds some nudges harder than others

George Loewenstein and Peter Ubel published this Op Ed in the New York Times entitled Economics Behaving Badly. It is not every day that prominent behavioral economists emphasize the limits of what they do, so we thought they deserved special mention here, (even if we are terribly late getting to this).

The article mentions some of the less-whelming behavioral economic interventions of late, and stresses that babies and bathwater need to be identified when rethinking existing systems.

Here is a representative quote:

Behavioral economics should complement, not substitute for, more substantive economic interventions. If traditional economics suggests that we should have a larger price difference between sugar-free and sugared drinks, behavioral economics could suggest whether consumers would respond better to a subsidy on unsweetened drinks or a tax on sugary drinks.

But that’s the most it can do. For all of its insights, behavioral economics alone is not a viable alternative to the kinds of far-reaching policies we need to tackle our nation’s challenges.

They mention that a program designed to reduce energy consumption by revealing neighbor’s consumption had modest effects of 1 to 2.5 percent. Since then, a working paper A working paper entitled Energy Conservation ‘Nudges” and Environmentalist Ideology: Evidence from a Randomized Residential Electricity Field Experiment by Dora L. Costa by Matthew E. Kahn, based on the same on the same study suggests that the effect can backfire as a function of the audience. Here’s the abstract:

“Nudges” are being widely promoted to encourage energy conservation. We show that while the electricity conservation “nudge” of providing feedback to households on own and peers’ home electricity usage works with liberals, it can backfire with some conservatives. Our regression estimates predict that a registered liberal who pays for electricity from renewable sources, who donates to environmental groups, and who lives in a liberal neighborhood reduces consumption by 3.1 percent in response to this nudge. A registered conservative who does not pay for electricity from renewable sources, who does not donate to environmental groups, and who lives in the bottom quartile liberal neighborhood increases consumption by 0.7 percent.


  1. Dan ubel | 2p-tech says:

    […] The limits of behavioral economics […]

    March 3, 2011 @ 7:02 pm

  2. Deb Budd says:

    So, if I understand the behavioral insight, we are more influenced by information about the behaviors of people we already aspire to emulate? And conversely, are negatively motivated when those people are not who we aspire to be? Interesting stuff, and this possibly goes a long way to explaining the current political divisions and how the divide continues to expand…

    May 4, 2011 @ 12:38 pm

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