Expert Explores Behavioral Economics as Policy Tool

The field of behavioral economics offers public policymakers critical insights. However, it is important not to rely too heavily on this fashionable intellectual approach in analyzing and trying to solve complex societal problems, Glenn Harrison, director of Georgia State University's Center for the Economic Analysis of Risk (CEAR), said during a recent visit to the Atlanta Fed.

During a March 12 speech and interview, Harrison discussed the pros and cons of applying behavioral economics to public policy, and he also delved into aspects of risk analysis. View a video of Harrison's conversation with Atlanta Fed Vice President and Senior Economist Paula Tkac.

Behavioral economics, which the Financial Times of London recently dubbed one of the hottest ideas in public policy, is a mix of economics and psychology. The discipline aims to couple research on the psychology of decision making with economic theory to better understand why people make financial and economic decisions.

At the Atlanta Fed, Harrison noted a couple of concerns about using behavioral economics to craft public policy. For one, the field experiments common to this approach risk using a "clean-beaker science….in a dirty-beaker world." In other words, certain field experiments used in a behavioral economics approach—for example, drug trials that do not account for conditions a person has that are unrelated to the target of the drug—might not adequately consider the messiness of reality, Harrison said.

Second, he said behavioral economics is so popular that it could become overhyped. A severe backlash could damage the credibility of behavioral economics and thus detract from the field's genuine value, Harrison said.

Turning to risk, Harrison told Tkac that the CEAR studies the concept not as it applies solely to financial matters. "To me, risk is everywhere and that means that risk touches every area of analysis and policy that we are interested in," said Harrison, professor and holder of the C.V. Starr Chair of Risk Management and Insurance at Georgia State. "We are working closely with Glenn and his colleagues at CEAR to study how the public thinks about inflation," said Mike Bryan, vice president and senior economist at the Atlanta Fed.