Behavioural Economics is a rapidly expanding field and everyday new research is being developed in academia, tested and implemented by practitioners in financial organisation, development agencies, government ‘nudge’ units and more. This interview is part of a series interviewing prominent academics in the field. And in today's interview the answers are provided by Daniel Read.
Daniel is professor of behavioural economics at Warwick Business School. He has held faculty positions at Leeds Business School, LSE and Durham Business School, with visiting positions at INSEAD, Yale School of Management, and Rotterdam Business School. Besides being a succesful academic who has published in the highest ranking journals, Daniel has also consulted for the UK government and the Financial Services Authority on many aspects of behavioural economics, especially as it relates to consumer welfare and environmental marketing.
Who or what got you into Behavioural Economics?
I got into behavioural economics when I was applying for PhD programs and received an offer to study with Daniel Kahneman at UBC (University of British Columbia). I learned about Behavioural Economics while travelling across Canada by train, going from Ottawa to Vancouver. Oddly, I learned nothing about it during my undergraduate years.
What is the accomplishment you are proudest of as a Behavioural economist?
I have done some good work in intertemporal choice. I think the most important result is a quite recent paper written jointly with Robin Cubitt and Rebecca McDonald on the distinction between "uni-modal" and "cross-modal" discounting. When people are trading off very different outcomes over time (such as, deciding whether to have a vacation this year or put an extension on the house next year), the effect of time on their preferences is very small. But when they are trading off very similar outcomes (such as a vacation this year or a vacation this year) the effect of time is much greater and, specifically, they discount a great deal for delay. This aligns with a general theme of much of my work, which is that we cannot speak of people having a specific discount rate or a specific form of discount function--- it depends almost entirely on what decision they are making. Moreover, by asking people simple questions in experiments based on stimuli in which only one thing varies (which seems like a good experimental procedure) we greatly exaggerate the importance of those stimuli in people's thinking. I am also proud of my work on attribute-based models of time discounting, work done mostly with Marc Scholten.
Another concept I am proud of is "choice bracketing", which concerns the effect of how many choices we consider when making decisions. I wrote a few papers on this, three of them with George Loewenstein -- an inspiring collaborator. Narrow bracketing is the tendency to think of choices one at a time, and thereby to disregard the implications of that choice for other choices you are going to make.
If you weren’t a behavioural economist, what would you be doing?
A novelist or a manager at McDonalds. Or both.
How do you apply behavioural economics in your personal life?
I try to use psychology and economics whenever I can. I think it does help me make at least simple economic decisions in a rational way. For instance, when buying dishwasher tablets I will choose based on cost/tablet, or when buying car insurance I generally go with the one offering the cheapest total cost. Considering total cost is always important, and I think a lot of people slip up by not considering hidden costs. For most economic decisions I think that the market is pretty efficient, so even if we are biased we tend not to make huge mistakes so being a behavioural economist doesn’t help all that much.
I think with personal decisions knowing the science does not always help. As an illustration, whereas I know I am overconfident, I don’t know by how much and even if I could adjust for overconfidence I am not sure it would help. Or, I know I have a “home bias” and like my children’s work more than that of other children, but again I don’t know if it would help to adjust for that home bias -- in fact, it might have a negative effect on my personal relationships. In general, I think that knowing you are prone to bias and error is mostly useful if everyone else knows it too. If you adjust for your biases, you can often come across as wavering and diffident.
With all your experience, what skills would you say are needed to be a behavioural economist? Are there any recommendations you would make?
The term behavioural economics is a bit chaotic right now, because it is used by an awfully wide range of people. That can include pretty well anyone who has read Thinking Fast and Slow or Predictably Irrational, to the most rigorous economists and psychologists. So it is a broad church (an English expression meaning a group that allows for a lot of different types of followers). I expect you could make a living as a consultant from a close reading of Thinking Fast and Slow. But here are the skills I think are needed: (1) Psychological intuitions. You must feel the pushes and pulls of your own motives, and recognise them in others. (2) Quirkiness. If human motivation was simple we would not need behavioural economics. It is because it raises puzzles that we are interested, but it is up to us to define those puzzles. (3) Creativity. Good research requires as much creative thinking as good art or good food. (4) Training. You need to be at least mediocre as an economist, a psychologist, and a statistician, and for one of these you must be outstanding.
How do you think behavioural economics will develop (in the next 10 years)?
Our science is developing in many ways and it is hard to predict how it will develop -- a statement that is true with respect to everything. But here is what I am willing to say I think. First, I believe that the focus on irrationality, and even the concept of irrationality, will disappear. Irrationality was a useful concept to get the field moving, but it is impossible to say that a given behaviour is irrational except by invoking idiosyncratic definitions of irrationality. We learn nothing from the term, and it distracts us by making us think that a kind of “irrationality” is a behaviour or bias, when it is in fact only an interaction between some behaviours and some arbitrary normative standards.
Second, many of the categories that are the basis of the field will also vanish. One category I have studied a lot is time, and while I still do research in “intertemporal choice” I predict that very soon we will recognise that time is just one of countless attributes that influence choice and that time is no different than all those other attributes. It is not even clear that “time” is one concept. More generally, I predict that many of the categories we use in our field will turn out not to be useful scientific concepts but merely useful ways of describing behaviours that have little fundamental in common.
Third, there is a revolution going on in the methods we use to test hypotheses in behavioural economics. The revolution is, I think, more devastating than we have yet realised. We have consistently oversold our research, drawing conclusions based on small samples and ungeneralisable designs, we have kept almost countless “uninteresting” failures to replicate in the file drawer, and we have engaged in a great deal of p-hacking without even realising that is what we were doing. My prediction is that when the dust settles, we will have far fewer phenomena in behavioural economics, and these will tend to be phenomena that match our intuitions. The “sexy” counterintuitive findings that filled the journals for a while (I think since the 1960s) will start to wither away -- indeed that is already happening.
Thank you so much for these amazing answers Daniel! I'm not too sure whether you'd be a very succesful manager nor novelist as you are such a perfectionist. The work would never be done in your eyes! As I said before, this interview is part of a larger series which can also be found here on the blog. Make sure you don't miss any of those, nor any of the upcoming interviews! Keep your eye on Money on the Mind!