Knowing and Making

This story , from the Washington Post via Free Exchange, is a perfect example of the challenge for behavioural economics. For weeks after he was laid off, Clinton Cole would rise at the usual time, shower, shave, don one of his Jos. A. Bank suits and head out the door of his Vienna home -- to a job that no longer existed. It's easy to look at this and say "he's not behaving rationally. How amusing - people are a bit nuts sometimes". It's much harder to look at it, work out a plausible model for why he behaves that way, find an abstract description of the model, extrapolate it to other situations which appear different on the surface, and test your theory against experiment or data. But that's what behavioural economics - or cognitive economics, or the study of decision-making - has to do. I've just finished Vernon Smith's memoir Discovery , about which I may write more later - but here's a very perceptive couple of quotes: ...the cognitive psychol...

The Economist's underrated Free Exchange blog asks: Can behavioural economics save newspapers ? Of course the Economist itself is famous for designing a multi-product framing approach (see the first chapter of Dan Ariely's Predictably Irrational for details) which successfully biases customers to switch to a higher priced subscription. The phenomenon they describe is either a good example of price discrimination (a commenter suggests environmental benefits), or a clear instance of cognitive bias. Perhaps it's both. While you're visiting Free Exchange, they also link to Alex Tabarrok discussing QALYs . I went to a lecture by Tony Atkinson at the RSA last week which discussed this issue. The conversation there was about how to value health outcomes as a component of GDP (and by extension, government services in general - which in the US are valued at cost, but in Europe are valued by an output measure which is meant to estimate their value). One approach is to attempt t...