Recently NPR ran a piece about the impact behavioral economists — the folks who argue that people aren’t calculators — are having on the Obama administration. NPR gave a sample of the dizzying amount of hard empirical research backing up behavioral economics, then asked, “So why would economists assume that human beings are so hyper-rational?” One answer’s obvious — house of cards, meet puff of wind:
An imperfectly rational human being challenges a really important idea: the notion that markets work well because individuals can be counted on to make the best choice for themselves.
But there’s another, less obvious reason. Economists like their models the way Martha Stewart likes her doormat: clean and under control. Their reaction to the little-kids-with-muddy-bare-feet messiness of how people actually make decisions?
“Behavioral economics has identified a dizzying array of human foibles. We clearly can’t incorporate all of them, and because of that, people feel that incorporating one error into your model may be just as unrealistic as incorporating none,” says Ed Glaeser, a professor of economics at Harvard University.
Or to use more technical language, ewwwww.
So if you decide that you can’t ignore the muddiness of reality, what do you do? That’s the reason for the next step in the model: Understand the Actors & Their Ecosystem. If we want to push the economy towards a particular value that matters to us, we can’t make simple assumptions about the way the world works just because it’s easy. We’ve got to dig in and get dirty.
Up next: getting dirty on the farm.
