“When all economists are equally open-minded and are willing to incorporate important variables in their work, even if the rational models says those variables are supposedly irrelevant, the field of behavioral economics will disappear. All economics will be as behavioral as it needs to be. And those who have been stubbornly clinging to an imaginary world that consists only of Econs will be waving a white flag, rather than an invisible hand” (Thaler 2015 p358), so says the current president of the American Economic Association, Chicago economist Richard Thaler.
Behavioral economics is the union of behavioral sciences that focus on describing observable human behavior (i.e., psychology, sociology, and anthropology) and economic science that focuses on the process or system by which goods and services are produced, sold, and bought. What people actually do when allocating scarce resources, as compared to what traditional economics suggests people should optimally, rationally do. In development over the past fifty plus years, behavioral economics has added great insights and significant refinements to economic theory. The four books I recommend here both highlight the development of the field of behavioral economics and its current best practices.
Much has been learned about how to bring the experimental approach of behavioral sciences to economics, both in the laboratory and in the field. Thaler’s Misbehaving tackles some of economic theory’s bigger insights, showing how simple lab experiments, designed elegantly, can test grand theories, such as game theoretic assumptions about the ultimatum game, endowment effects, sunk costs, and the efficient market hypothesis. Showing that “Humans” are triply bound by bounded rationality, bounded self-interest, and bounded willpower, Thaler has studied how to nudge people in directions they would choose if they were as unbounded as “Econs” assume.
In The Why Axis, Gneezy and List add a whole different dimension of experimentation, starting with “natural” field experiments, where life provided an experimental setting where one part of a group received one treatment and the other part another (e.g., a new border was drawn through a town, with different laws imposed on each side), and moving onto designed field experiments, where groups are randomly assigned to one treatment versus another (e.g., schools in a school district getting different funding for special projects). The trick is how to see the experiment, to see the design, so that it cleanly separates the two conditions with the treatment being the only difference. The difficulty of doing this in the world, where many things are happening at once, is why the behavioral sciences have focused on laboratory experiments, until now. Showing how to provide incentives for schools fighting violence or getting kids to eat healthy foods, for companies placing discount flyers in newspapers, and charitable giving, the authors show how clever thinking can rigorously test the impacts of different incentives within existing systems.
From MIT’s Abdul Latif Jameel Poverty Action Lab, Glennerster and Takavarasha provide a detailed, practical guide to Running Randomized Evaluations. The book is full of examples from the lab’s work over the past decade in testing grand theories for development and poverty alleviation across large sections of the world. This book takes the mystery in the design of the previous books listed above, and unpacks how to design these field experiments.
Michael Schrage takes the experimental approach to businesses, with the maxim to stop the practice of initiating large-scale, untested implementations of new strategies, and to start the practice of rapid experimentation with the 5x5x5 design. From his vast experience, Schrage has refined his framework to “5 teams of 5 people each..given no more than 5 days to come up with a portfolio of 5 ‘business experiments’ that should take no longer than 5 weeks to run and cost no more than 5,000 euros to conduct” (p97). Easy to remember — lots of 5s. 5 teams of 5 people, 5 days, 5 experiments, 5 weeks, 5,000 euros. “A rapid innovation methodology emphasizing lightweight, high-impact business experimentation…creat(ing) a vibrant internal market of business hypotheses and portfolios of experiments” (p96). This is “designed to make disruptive innovations not just possible but probable” (p97).
Citing Kevin Kelly, the founding editor of Wired magazine, Schrage suggests that “Machines are for answers; humans are for questions” (p197). These recommended books put humans back in the game, looking at clever ways to see how normal people act, in all of the complexity of everyday life, finding ways to enable these same people to make the decisions maybe they wished they had.