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January 21, 2005

Economics Catches Up With Common Sense

I am all for the new investigations of "behavioral economics" or "neuroeconomics" as the hip new economic studies, detailed in this past week's Economist, are called, as they investigate economic actions in relations to the operations of the mind.

But sometimes their conclusions make you say, well, Duh. After a lot of hand waving, they come to conclusions that everyone else already knew.

Part of the problem is that economists spend much of their time trying to explain why people don't act perfectly rational, discounting future risk and reward with precision. For everyone else, who have noticed that people aren't always rational and reasonable, the answer is kind of obvious. But economists need a lot of research to even consider that pure free market doctrine isn't the guide to reality and all public policy. To take one experiment detailed in the Economist:

In one recent experiment, noted in our science section on October 30th, Mr Laibson and others found that the brain's response to short-term riches (in this case, gift certificates of $15 or $20) occurs largely in the limbic system, a region that governs emotion. By contrast, the prospect of rewards farther into the future triggers the prefrontal cortex, which is often associated with reason and calculation. Thus, choosing immediate economic gratification, by spending excessively on credit cards or not saving enough even though you “know better”, could be a sign that the limbic system is in charge.
A lot of fancy words to notice that people do impulse buying that they often regret later when they have time to think about it. And the solution:
Government policies, such as forced savings or “cooling off” periods for buying property or cars, may be one remedy.
So a free market "buyer beware" policy isn't the ideal consumer policy. Glad to see modern economic research has been able to explain the New Deal and the consumer protection movement.

The neurological research may be fascinating in its own right, but you just have to laugh watching economists using it to shadowbox with their own ridiculous theoretical starting points.

Posted by Nathan at January 21, 2005 06:41 AM