It’s time to bring more realistic models of human behaviour into economic policy

Next step to improve upon state of the art should be something only slightly more complex. The best candidate seems to be Regret theory. "Regret theory: An alternative theory of rational choice under uncertainty", Economic Journal, 92(4), 805–824, Loomes, G. and Sugden, R.

Rational choice theory assumes that people don't have internal time dependent state in their choices. Regret theory adds the anticipation of regret. It adds just one term into utility function but it covers many aspects of human behavior. There is also empirical support backing it up.

http://people.few.eur.nl/wakker/pdfspubld/15.2regret_history...

Kahneman famously won the Nobel in economics as a sort of belated acknowledgement. (Belated because Tversky passed away before they got it).

Blah blah dismal science and all that, but microeconomics is considerably less hand wavy than macroeconomics and at least in the US there are all sorts of policies that pretend that people don't respond to incentives (never mind if they respond as homo economicus or not).

Behavioral economics is very useful, and there are still tons of unexplored questions in the field. But importantly: behavioral econ is more speculative than standard econ. Behavioral econ models depend on getting both econ and human psychology right. Even if such models are fleshed-out, human behavior is quite plastic. So behavioral models are less likely to be correct when applied outside of present-day western culture.

> Raj Chetty has estimated that every $1 of tax subsidy only leads to around 1 cent of additional saving (making it a pretty good place to start if you have a large budget deficit to sort out).

Wow. That's horrific. I suspected it was inefficient, but this is much worse than I thought.

> Think about ‘social trust’. It’s a better predictor of national economic growth rates than human capital, and varies greatly between countries.

Viewed alternately: Mistrust is a drag on economic growth. The people I spend to keep you from ripping me off are people that make no net contribution to the economy as a whole.

And here's my take on what needs to happen to macroeconomics: People want different things. Some want savings. Some want status. Some want to improve their human capital. Some want to have fun. (And, there may be other major categories as well.) In fact, most people want several of those things. At any given time, they seek several different goals. The economy is made up of people who have different amounts of emphasis they place on the different categories, but the economy as a whole might be characterizable by the sum of peoples' emphasis on each of the categories.

A change in circumstances can make them change the emphasis that a person gives to different category. A large, economy-wide change can change a the emphasis of a whole lot of people, and therefore change the behavior of the economy as a whole. Macroeconomics might be able to figure out from, say, the shock of 2008, that many people are going to be in fear, and place much more emphasis on preserving their savings, and from that figure out what the effect on the economy will be going forward (at least until peoples' perception of their circumstances changes).

My favorite points were

- Unpack ‘animal spirits’. These arise in the minds of economic actors. We can unpack the biases behind them and do something about them – an indeed BIT is currently working on such a project.

The debate on "animal spirits"[0] is ongoing, but the potential payoff from understanding them is huge. They deserve more research using more modern ideas and methods.

- Promote rainy-day saving. Recent work suggests that the behavioural and economic effects of having even small amounts of saving are even larger than previously thought.

There are two contradictory arguments often made in regard to poverty and rational behavior: (A) poor people are completely constrained by their poverty and unable to make the "right" decision to save and (B) poor people are unable to make rational decisions because poverty affects their decision making ability. I am mostly in the (B) camp and as such, I think that helping poor people to behave more rationally is a great idea. However it does require honestly stating that poor people do make bad decisions, even if anyone else in that situation would have done the same.

The weakest point IMO was

- Trial light-touch ways to improve estimates by key economic actors. Encourage the use of estimation frames.

This is based on a claim that is much more general, and therefore requires more evidence. I would like to see a lot more studies on improving estimation accuracy in general, before I accepted that there is some general formula to make people's estimates more accurate.

[0] A term of trade for Keynes' original, but discarded by the mainstream, idea that markets were moved by irrational exuberance/pessimism by society as a whole. The main advocate of this theory today is Robert Schiller.

I don't know much about economics, but it seems this kind of environment (a national-scale, economic video game) could provide a mass of data to inform the 10 suggestions from the author. "practice based on plausible myths" - the opposite of this is practice based on meaningful, real-time data about economic actors, right? Would be very curious of an economists opinion of the role of such a system..

You can know the decision an actor makes, but not the motivation. You can know the motivation an actor has, but not any future decision.

HAHAHA! That is honestly one of the most laughable statements I've seen in years. Yes, "get the internet to fix it". The idea of useful price comparison sites free of bias and toxic reviews magically arising from the chum is lunacy. We all know how useful Amazon reviews are, or how travelocity has produced a generation of purely rational travel consumers.