Recently I was asked to contribute some ideas on the future of behavioural economics – these my v short thoughts
The past ten to fifteen years has seen an explosion in the development and use of behavioural economics (BE). One driver was clearly a dissatisfaction with the traditional economics concept of homo economicus or the “rational actor”.
My sense is that whilst BE has demonstrated a far better way to examine and explain economic activities, it really only looks at part of the issue. It pretty much concentrates on agent behaviour (whether individual or group) and has yet to develop into a wider understanding of overall activity. I think the “missing piece”, that will be worked on in the coming years, is network theory; and in particular applying ideas from Complexity Science.
So my “predictions/guesses” for the next twenty years (!!) are:
Some of the existing BE will challenged successfully by traditional economics – e.g. facile laundry lists of biases and loose talk about rationality will be seen to be unhelpful and a dead end.
Also the field of physics will put in a strong challenge to some BE ideas of irrationality – we are already seeing this with a battle developing around the application of ergodicity to challenge marginal utility. I have no idea how this will pan out.
Where I feel more confident is that lessons from biology (e.g. spread of medical viruses and the concept of super-spreaders) and in particular Complex Adaptive Systems will play an important part. In time whilst I think BE will retain a strong place in explaining the actions of agents, it will also be complemented by explanations of how these agents, act and react within networks. Importantly Complexity will show many network relationships are not linear and may well be inherently “unpredictable”. (This may be bad news for main stream economic commentators?).
Finally, a short example, let’s consider systemic risk in the global banking system. Currently there is massive regulatory oversight of individual financial institutions (the agents in the system), and a great deal of interest in BE about their choices regarding decision making. In future (work has already commenced by some central banks) there will be much closer analysis of the connectivity between institutions and the sometime hidden or only partially understood networks that may underlie the financial system. These ideas will also be useful in patterns of consumer behaviour, the role of “influencers” in markets….and perhaps an uncomfortable thought, this network analysis will show that much will remain unpredictable and may even be random.
So I think BE is only a partial answer – it has been v successful in uncovering agent motives and actions, but it will be Complexity Science that builds on it to help us having a more complete (or perhaps more accurately a less incomplete) understanding of economic activity.