Sunday, June 29, 2008

Oh, The Places We Will Go!

Wow. Amazing. This guy thinks that all we need to do is study sociology, and the government will work better.


All we need to do is study public choice, and STOP USING GOVERNMENT FOR THINGS IT CAN'T DO, like create "justice" in income. And government would work better.

Behavioral Decision Research, Legislation, and Society: Three Cases

Max Bazerman
Capitalism and Society, March 2007

"There is little doubt that the field of economics has had a much greater influence on government policy in Washington and in other world capitals than have the other social sciences (Bazerman and Malhotra, 2006). In terms of influence, the economists have won. Unfortunately, government policies have led to millions of jobs and tens of millions of retirement plans being lost to accounting scandals, the commercial extinction of the majority of the world's large fisheries, the needless deaths of thousands of Americans each year because of the stupidity of the U.S. organ donation system, and numerous other inefficiencies (Bazerman and Malhotra, 2006). Economic logic lies behind each of these disasters, without the input needed from other
informative social sciences. The stories in this article extend this argument to claim that the failure of courts and policymakers to be informed about other social sciences (in this case, behavioral decision research) leads to the corruption of policy-formulation process and low-quality outcomes for society. Creating wise policies in society requires us to incorporate a modern understanding of unconscious or unintentional processes in decision making. For far too long, the unconscious has been associated with psychological perspectives that have not stood up well to empirical testing (e.g., Freudian psychology). Currently, a very different approach to understanding the human mind has been developed by rigorous scientists, who
have confirmed the importance of unconscious or unintentional processes (Banaji et al., 2004). Leaders must consider how the institutions that they create affect both intentional and unintentional bases of misconduct.

Without such attention to these forces, it is far too easy to accept the institutions that drive unethical behavior despite the absence of what is traditionally viewed as an unethical act. When creating policy, we need to apply sound social science logic and use the best empirical data to assess what is likely to occur under different policies. Far too often, we accept the status quo (Baron, 1998), particularly if economic theory (lacking data) can show that it is feasible that the status quo is acceptable. In policy-making domains, this feasibility test should be replaced with the broader question of where the preponderance of the evidence lies.

Furthermore, this evidence should come from a variety of social sciences. We should give the current state of a policy issue far less weight, as it is clear that enormous inefficiencies exist in so many current policies (Bazerman et al., 2001; Baron). In each of the three stories in this paper, I believe that government decision-makers overweighed a simplistic version of economic theory. In the auditor story, the SEC misapplied the logic of cost-benefit analysis and failed to make the appropriate changes needed to create auditor independence. In the antitrust story, the pharmaceutical firms attempted to justify their behavior by showing that economic theory could be contorted to explain their deal in a manner that did not restrain trade. Finally, in the tobacco story, the prevailing belief in pure economic theory was used to mount a Daubert challenge to the use of behavioral decision research. Ample evidence suggests that economic theory plays a central role in the policy-formulation process. It is unfortunate that it does so to the exclusion of useful information from other social sciences.

Milton Friedman argued that unrealistic assumptions in economic theory do not matter as long as economic theory predicts behavior, and that economic theory does a pretty good job of predicting behavior (Friedman, 1953). The problem is that other social sciences have advanced to the extent that we now know of systematic patterns when we can adjust economic theory to make better predictions, yet decision-makers are not using this knowledge from other social sciences sufficiently. Economists too often counter that their theory has rigor (i.e., it is formalized) and explains all behavior, as compared to other social sciences that have diverse theories for different contexts (Ferraro et al., 2006). In the perceived battle between economics
and the other social sciences, it often appears that economics wins. Yet when harder physical scientists look at economics, they typically are deeply critical of the illogic of building formalizations on faulty assumptions (Beinhocker, 2006). The debate about the appropriateness of using different theories should depend on our purpose. If our goal is the scientific pursuit of a single theory to explain all human behavior, economic theory and evolutionary theory are doing pretty well. If our goal is to make specific predictions in specific contexts, we know of many contexts in which behavioral decision research and other social sciences regularly outperform
economic theory. And if we want to create optimal public policy, we clearly need to combine economic theory with useful insights from many other fields."

(Nod to KL, who already works better)


Tom said...

"little doubt... economics [has] a much greater influence"??

If there is truly little doubt about that, then I, personally, must be having ALL of it.

Er -- how are economists responsible for "accounting scandals"? Did I miss a paper supporting sloppy record keeping or the corporate culture? As for the shortage of organs, that's exactly what any worthy economist would predict when the system absolutely forbids the owner of an organ from profitting from it. Everybody else in the system can gain from the transaction, but not YOU - stupid owner! "Where's your sense of sacrificing for the greater good -- selfish owner-person!"

Tom said...

For more on the whelming influence of economists on public policy, read what the Copenhagen Consensus says about the importance of fighting Antropogenic Global Warming.