hello so as you just heard from tsveti I’m nickim yours I’m a professor of
I’m nickim yours I’m a professor of
I’m nickim yours I’m a professor of economics and now that you know that
economics and now that you know that
economics and now that you know that you’re thinking oh no economics the
you’re thinking oh no economics the
you’re thinking oh no economics the dismal science and the last talk of the
dismal science and the last talk of the
dismal science and the last talk of the day and maybe you’re trying to think how
day and maybe you’re trying to think how
day and maybe you’re trying to think how you might get out the back door but I
you might get out the back door but I
you might get out the back door but I hope you won’t do that
hope you won’t do that
hope you won’t do that and if you stay I’m going to try to
and if you stay I’m going to try to
and if you stay I’m going to try to explain to you how we might make
explain to you how we might make
explain to you how we might make economics less dismal so first of all
economics less dismal so first of all
economics less dismal so first of all how many of you have taken an economics
how many of you have taken an economics
how many of you have taken an economics class okay a whole bunch of you so maybe
class okay a whole bunch of you so maybe
class okay a whole bunch of you so maybe some of you have already been wondering
some of you have already been wondering
some of you have already been wondering about some of the things I’m going to
about some of the things I’m going to
about some of the things I’m going to talk about today but maybe others of you
talk about today but maybe others of you
talk about today but maybe others of you who haven’t taken an economics course or
who haven’t taken an economics course or
who haven’t taken an economics course or weren’t thinking these things are
weren’t thinking these things are
weren’t thinking these things are wondering why should I care about this
wondering why should I care about this
wondering why should I care about this the work of some dusty old economists
the work of some dusty old economists
the work of some dusty old economists and some kind of an ivory tower but I
and some kind of an ivory tower but I
and some kind of an ivory tower but I want to tell you that the models that
want to tell you that the models that
want to tell you that the models that economists work on are used to determine
economists work on are used to determine
economists work on are used to determine things that are really important to your
things that are really important to your
things that are really important to your life like interest rates that gets set
life like interest rates that gets set
life like interest rates that gets set to try to fend off recessions or
to try to fend off recessions or
to try to fend off recessions or inflation or the advice that your
inflation or the advice that your
inflation or the advice that your financial broker is going to give you
financial broker is going to give you
financial broker is going to give you about how much you should save for your
about how much you should save for your
about how much you should save for your old age so the thing is though that in
old age so the thing is though that in
old age so the thing is though that in many fields the experts use different
many fields the experts use different
many fields the experts use different kinds of approaches and those different
kinds of approaches and those different
kinds of approaches and those different approaches compete with each other and
approaches compete with each other and
approaches compete with each other and drive rapid change and how the experts
drive rapid change and how the experts
drive rapid change and how the experts do their work but economics is different
do their work but economics is different
do their work but economics is different since around the 1950s economics has
since around the 1950s economics has
since around the 1950s economics has been pretty much completely dominated by
been pretty much completely dominated by
been pretty much completely dominated by one approach and that approach is
one approach and that approach is
one approach and that approach is grounded in some assumptions that people
grounded in some assumptions that people
grounded in some assumptions that people behave like this character Homo
behave like this character Homo
behave like this character Homo economicus and what I want to tell you
economicus and what I want to tell you
economicus and what I want to tell you is that the models that we build that
is that the models that we build that
is that the models that we build that are based on this assumption utterly
are based on this assumption utterly
are based on this assumption utterly fail to predict economic outcomes so
fail to predict economic outcomes so
fail to predict economic outcomes so here what I’m showing you our two graphs
here what I’m showing you our two graphs
here what I’m showing you our two graphs these graphs were made in 2008 by
these graphs were made in 2008 by
these graphs were made in 2008 by economists predicting economic
economists predicting economic
economists predicting economic performance over the very near future
performance over the very near future
performance over the very near future the little gray lines
the little gray lines
the little gray lines show the predictions by individual
show the predictions by individual
show the predictions by individual economists or institutions the green
economists or institutions the green
economists or institutions the green line if you can see if there is the
line if you can see if there is the
line if you can see if there is the average prediction and the big black
average prediction and the big black
average prediction and the big black line that makes the big dip is actual
line that makes the big dip is actual
line that makes the big dip is actual economic performance because as you
economic performance because as you
economic performance because as you might remember this is data for the US
might remember this is data for the US
might remember this is data for the US economy the US economy took a big plunge
economy the US economy took a big plunge
economy the US economy took a big plunge in the round 2009 or the end of 2008 now
in the round 2009 or the end of 2008 now
in the round 2009 or the end of 2008 now what you can see there is that the on
what you can see there is that the on
what you can see there is that the on the third quarter on the left the third
the third quarter on the left the third
the third quarter on the left the third quarter of 2008 he kind of us were
quarter of 2008 he kind of us were
quarter of 2008 he kind of us were predicting a downturn but kind of a
predicting a downturn but kind of a
predicting a downturn but kind of a little small downturn and then a quick
little small downturn and then a quick
little small downturn and then a quick recovery the right you see the graph
recovery the right you see the graph
recovery the right you see the graph from the fourth quarter of 2008 now the
from the fourth quarter of 2008 now the
from the fourth quarter of 2008 now the economy is pretty much already in
economy is pretty much already in
economy is pretty much already in freefall but economists were still
freefall but economists were still
freefall but economists were still dramatically under predicting the extent
dramatically under predicting the extent
dramatically under predicting the extent of the fall and over predicting how
of the fall and over predicting how
of the fall and over predicting how quickly the economy would recover but
quickly the economy would recover but
quickly the economy would recover but it’s not just that economists fail to
it’s not just that economists fail to
it’s not just that economists fail to produce to predict big things like
produce to predict big things like
produce to predict big things like recessions economists also do really
recessions economists also do really
recessions economists also do really poorly in predicting much smaller things
poorly in predicting much smaller things
poorly in predicting much smaller things like whether a food production program
like whether a food production program
like whether a food production program in Africa might reduce child nutrition
in Africa might reduce child nutrition
in Africa might reduce child nutrition so money gets spent on these policies
so money gets spent on these policies
so money gets spent on these policies but they don’t have the intended impact
but they don’t have the intended impact
but they don’t have the intended impact so what I want to explain today is how
so what I want to explain today is how
so what I want to explain today is how we can trace these failures to that
we can trace these failures to that
we can trace these failures to that assumption that people behave like Homo
assumption that people behave like Homo
assumption that people behave like Homo economicus and I want to tell you that
economicus and I want to tell you that
economicus and I want to tell you that we need to replace this assumption by a
we need to replace this assumption by a
we need to replace this assumption by a different assumption the assumption that
different assumption the assumption that
different assumption the assumption that people behave like personae sociales
people behave like personae sociales
people behave like personae sociales social people now to understand my
social people now to understand my
social people now to understand my argument let’s start by taking a little
argument let’s start by taking a little
argument let’s start by taking a little closer look at that character Homo
closer look at that character Homo
closer look at that character Homo economicus Homo economicus is first and
economicus Homo economicus is first and
economicus Homo economicus is first and foremost economicus always carefully
foremost economicus always carefully
foremost economicus always carefully calculating each decision to make sure
calculating each decision to make sure
calculating each decision to make sure that it will bring the most possible
that it will bring the most possible
that it will bring the most possible happiness given that actors resources
happiness given that actors resources
happiness given that actors resources but Homo economicus is also Homo which
but Homo economicus is also Homo which
but Homo economicus is also Homo which means in Greek same or in Latin man so
means in Greek same or in Latin man so
means in Greek same or in Latin man so economists would find it very difficult
economists would find it very difficult
economists would find it very difficult to build a neck
to build a neck
to build a neck model based on all the unique behaviors
model based on all the unique behaviors
model based on all the unique behaviors of individuals of a large number of
of individuals of a large number of
of individuals of a large number of individuals so economists instead make
individuals so economists instead make
individuals so economists instead make their models based on the behavior of a
their models based on the behavior of a
their models based on the behavior of a single individual called the
single individual called the
single individual called the representative agent this representative
representative agent this representative
representative agent this representative agent behaves the same as most other
agent behaves the same as most other
agent behaves the same as most other individuals usually like a man modelled
individuals usually like a man modelled
individuals usually like a man modelled on male behavior but sometimes people
on male behavior but sometimes people
on male behavior but sometimes people say that this agent is modeled on
say that this agent is modeled on
say that this agent is modeled on gender-neutral behavior of an average
gender-neutral behavior of an average
gender-neutral behavior of an average person with no gender
person with no gender
person with no gender so these assumptions might seem kind of
so these assumptions might seem kind of
so these assumptions might seem kind of okay to you I mean don’t most people try
okay to you I mean don’t most people try
okay to you I mean don’t most people try to make themselves as happy as possible
to make themselves as happy as possible
to make themselves as happy as possible and why shouldn’t we study the behavior
and why shouldn’t we study the behavior
and why shouldn’t we study the behavior of an average person but I want to
of an average person but I want to
of an average person but I want to explain to you why both of these
explain to you why both of these
explain to you why both of these assumptions is actually highly
assumptions is actually highly
assumptions is actually highly problematic so let’s turn first to the
problematic so let’s turn first to the
problematic so let’s turn first to the economicus assumption in order to behave
economicus assumption in order to behave
economicus assumption in order to behave like Homo economicus would behave you
like Homo economicus would behave you
like Homo economicus would behave you have to be always carefully comparing
have to be always carefully comparing
have to be always carefully comparing each decision you make with every other
each decision you make with every other
each decision you make with every other possible decision so suppose you’re in
possible decision so suppose you’re in
possible decision so suppose you’re in the airport and you want a coffee you
the airport and you want a coffee you
the airport and you want a coffee you have to think before you spend three
have to think before you spend three
have to think before you spend three dollars on that coffee about every other
dollars on that coffee about every other
dollars on that coffee about every other possible use for that three dollars and
possible use for that three dollars and
possible use for that three dollars and that would of course take an enormous
that would of course take an enormous
that would of course take an enormous amount of brain power as well as time
amount of brain power as well as time
amount of brain power as well as time collecting information and so on and not
collecting information and so on and not
collecting information and so on and not only do you have to compare that coffee
only do you have to compare that coffee
only do you have to compare that coffee with every other option that’s available
with every other option that’s available
with every other option that’s available to you that same day you have to compare
to you that same day you have to compare
to you that same day you have to compare it with every possible option you would
it with every possible option you would
it with every possible option you would have in the future but that requires
have in the future but that requires
have in the future but that requires information that you can’t possibly know
information that you can’t possibly know
information that you can’t possibly know like what will next year’s iPhone look
like what will next year’s iPhone look
like what will next year’s iPhone look like or will there be a recession next
like or will there be a recession next
like or will there be a recession next year so most of us all of us in fact
year so most of us all of us in fact
year so most of us all of us in fact can’t possibly make those kinds of
can’t possibly make those kinds of
can’t possibly make those kinds of calculations especially as we can’t even
calculations especially as we can’t even
calculations especially as we can’t even know relevant information we rely on a
know relevant information we rely on a
know relevant information we rely on a missed call a rule simple behavioral
missed call a rule simple behavioral
missed call a rule simple behavioral rule like five every two years or saved
rule like five every two years or saved
rule like five every two years or saved now you
so why is our baby here okay like maybe
so why is our baby here okay like maybe we rock here so what seems to be pretty
we rock here so what seems to be pretty
we rock here so what seems to be pretty successful so give you anything tell you
successful so give you anything tell you
successful so give you anything tell you about some people get into that farmers
about some people get into that farmers
about some people get into that farmers back in nineteen eighty five ninety five
back in nineteen eighty five ninety five
back in nineteen eighty five ninety five the tobacco in the process of being
the tobacco in the process of being
the tobacco in the process of being privatized and oddly enough it was broke
privatized and oddly enough it was broke
privatized and oddly enough it was broke and as a result it didn’t pay any of the
and as a result it didn’t pay any of the
and as a result it didn’t pay any of the product they delivered so this is a shot
product they delivered so this is a shot
product they delivered so this is a shot to the back part and I see how adjusting
to the back part and I see how adjusting
to the back part and I see how adjusting the shock so I was driving around the
the shock so I was driving around the
the shock so I was driving around the countryside and my blue Lata and
countryside and my blue Lata and
countryside and my blue Lata and stopping where I saw people in the field
stopping where I saw people in the field
stopping where I saw people in the field and hopping out and talking to them and
and hopping out and talking to them and
and hopping out and talking to them and so I would ask how’s it going and
so I would ask how’s it going and
so I would ask how’s it going and everybody would say terrible we didn’t
everybody would say terrible we didn’t
everybody would say terrible we didn’t get paid there’s no money for seeds what
get paid there’s no money for seeds what
get paid there’s no money for seeds what can we live on and so on so then I would
can we live on and so on so then I would
can we live on and so on so then I would ask so with your land could you do
ask so with your land could you do
ask so with your land could you do something else and actually everybody I
something else and actually everybody I
something else and actually everybody I spoke to said yes some people said I
spoke to said yes some people said I
spoke to said yes some people said I have really good land I could do
have really good land I could do
have really good land I could do anything with this land and other people
anything with this land and other people
anything with this land and other people say well my lands not so good but I
say well my lands not so good but I
say well my lands not so good but I could produce potatoes so then I would
could produce potatoes so then I would
could produce potatoes so then I would ask so will you do that in view of the
ask so will you do that in view of the
ask so will you do that in view of the current situation and almost every
current situation and almost every
current situation and almost every single person said no I was a little
single person said no I was a little
single person said no I was a little surprised why and they told me very
surprised why and they told me very
surprised why and they told me very interesting things people told me well
interesting things people told me well
interesting things people told me well we’re tobacco farmers here that’s a rule
we’re tobacco farmers here that’s a rule
we’re tobacco farmers here that’s a rule of thumb or else they said we have these
of thumb or else they said we have these
of thumb or else they said we have these customs or these habits also rule of
customs or these habits also rule of
customs or these habits also rule of thumb one man told me tobacco is the
thumb one man told me tobacco is the
thumb one man told me tobacco is the most profitable crop that’s also a rule
most profitable crop that’s also a rule
most profitable crop that’s also a rule of thumb although one that in this case
of thumb although one that in this case
of thumb although one that in this case was kind of contradicted by the
was kind of contradicted by the
was kind of contradicted by the empirical evidence so mostly when I was
empirical evidence so mostly when I was
empirical evidence so mostly when I was out driving around
out driving around
out driving around I found men in the field and I spoke
I found men in the field and I spoke
I found men in the field and I spoke with men but I spoke with one woman and
with men but I spoke with one woman and
with men but I spoke with one woman and her behavior her responses were quite
her behavior her responses were quite
her behavior her responses were quite different which is something that will
different which is something that will
different which is something that will be important in a minute so she said to
be important in a minute so she said to
be important in a minute so she said to me when I asked if she would do
me when I asked if she would do
me when I asked if she would do something else yes next year I will
something else yes next year I will
something else yes next year I will plant potatoes because if I don’t get a
plant potatoes because if I don’t get a
plant potatoes because if I don’t get a good price from my potatoes I can feed
good price from my potatoes I can feed
good price from my potatoes I can feed them to my cow so you might think well
them to my cow so you might think well
them to my cow so you might think well okay but it just takes people a while to
okay but it just takes people a while to
okay but it just takes people a while to adjust their behavior but now I’m going
adjust their behavior but now I’m going
adjust their behavior but now I’m going to tell you about another example which
to tell you about another example which
to tell you about another example which I think is very interesting this is
I think is very interesting this is
I think is very interesting this is based on research by two economists from
based on research by two economists from
based on research by two economists from Harvard and New York universities and
Harvard and New York universities and
Harvard and New York universities and they use 2005 data from the afro
they use 2005 data from the afro
they use 2005 data from the afro barometer survey which surveys
barometer survey which surveys
barometer survey which surveys populations in Africa
populations in Africa
populations in Africa and they were looking at trust now Trust
and they were looking at trust now Trust
and they were looking at trust now Trust is very important for economic activity
is very important for economic activity
is very important for economic activity because since contracts are never
because since contracts are never
because since contracts are never complete you need to trust people in
complete you need to trust people in
complete you need to trust people in order to be able to engage in exchange
order to be able to engage in exchange
order to be able to engage in exchange so what these researchers looked at was
so what these researchers looked at was
so what these researchers looked at was whether the trust behavior of
whether the trust behavior of
whether the trust behavior of populations that lived in areas that had
populations that lived in areas that had
populations that lived in areas that had been affected by the slave trade back in
been affected by the slave trade back in
been affected by the slave trade back in the 1800’s was different from the trust
the 1800’s was different from the trust
the 1800’s was different from the trust behavior of people populations that
behavior of people populations that
behavior of people populations that lived in areas that had not been
lived in areas that had not been
lived in areas that had not been affected by the slave trade so long ago
affected by the slave trade so long ago
affected by the slave trade so long ago and what they found was very distinct
and what they found was very distinct
and what they found was very distinct differences people who lived in areas
differences people who lived in areas
differences people who lived in areas that had been affected by the slave
that had been affected by the slave
that had been affected by the slave trade were much less likely to trust a
trade were much less likely to trust a
trade were much less likely to trust a hundred and fifty or more years later
hundred and fifty or more years later
hundred and fifty or more years later then people who lived in areas that had
then people who lived in areas that had
then people who lived in areas that had not been affected by the slave trade so
not been affected by the slave trade so
not been affected by the slave trade so of course this doesn’t mean that people
of course this doesn’t mean that people
of course this doesn’t mean that people never change their behavior but it does
never change their behavior but it does
never change their behavior but it does mean that if you base your economic
mean that if you base your economic
mean that if you base your economic models on the assumption that people
models on the assumption that people
models on the assumption that people change their behavior quickly and
change their behavior quickly and
change their behavior quickly and homogeneous Lee then your models are
homogeneous Lee then your models are
homogeneous Lee then your models are going to really miss predict economic
going to really miss predict economic
going to really miss predict economic outcomes so what I want to tell you here
outcomes so what I want to tell you here
outcomes so what I want to tell you here is that we need to change that
is that we need to change that
is that we need to change that assumption of Homo economicus to an
assumption of Homo economicus to an
assumption of Homo economicus to an assumption of Hamas of cialis that is an
assumption of Hamas of cialis that is an
assumption of Hamas of cialis that is an agent that has limited cognitive ability
agent that has limited cognitive ability
agent that has limited cognitive ability and therefore use a rule of thumb which
and therefore use a rule of thumb which
and therefore use a rule of thumb which is heavily influenced by the people
is heavily influenced by the people
is heavily influenced by the people around him so now let’s think about the
around him so now let’s think about the
around him so now let’s think about the other part of the Assumption the homo
other part of the Assumption the homo
other part of the Assumption the homo part so what’s the problem with using a
part so what’s the problem with using a
part so what’s the problem with using a representative agent in our model the
representative agent in our model the
representative agent in our model the problem is that as economists have been
problem is that as economists have been
problem is that as economists have been looking more closely at the behavior of
looking more closely at the behavior of
looking more closely at the behavior of different economic agents in particular
different economic agents in particular
different economic agents in particular male and female agents we’ve discovered
male and female agents we’ve discovered
male and female agents we’ve discovered that there are very significant
that there are very significant
that there are very significant differences in the way that men and
differences in the way that men and
differences in the way that men and women respond to economic changes so one
women respond to economic changes so one
women respond to economic changes so one example is with spending behavior so
example is with spending behavior so
example is with spending behavior so there’s a study from 1998 by Shelley
there’s a study from 1998 by Shelley
there’s a study from 1998 by Shelley Phipps and Peter Burton that found that
Phipps and Peter Burton that found that
Phipps and Peter Burton that found that Canadian women are much more likely than
Canadian women are much more likely than
Canadian women are much more likely than Canadian men to spend an increase in
Canadian men to spend an increase in
Canadian men to spend an increase in their income on care for their children
their income on care for their children
their income on care for their children but maybe more surprising is the
but maybe more surprising is the
but maybe more surprising is the difference for finding in financial
difference for finding in financial
difference for finding in financial market behavior so uh many studies sorry
market behavior so uh many studies sorry
market behavior so uh many studies sorry I forgot to show you the
I forgot to show you the
I forgot to show you the unrepresentative agent many studies like
unrepresentative agent many studies like
unrepresentative agent many studies like this one have found that men and women
this one have found that men and women
this one have found that men and women respond very differently to investment
respond very differently to investment
respond very differently to investment risk so this study by bankrate in 2013
risk so this study by bankrate in 2013
risk so this study by bankrate in 2013 shows you that men were much more likely
shows you that men were much more likely
shows you that men were much more likely than women to say that they would accept
than women to say that they would accept
than women to say that they would accept more financial risk if it meant that
more financial risk if it meant that
more financial risk if it meant that there was the possibility of a larger
there was the possibility of a larger
there was the possibility of a larger payoff so what this means is that if we
payoff so what this means is that if we
payoff so what this means is that if we want to include in our model that done
want to include in our model that done
want to include in our model that done gendered agent and we don’t account in
gendered agent and we don’t account in
gendered agent and we don’t account in our model for the likely gender
our model for the likely gender
our model for the likely gender breakdown of our agents we’re going to
breakdown of our agents we’re going to
breakdown of our agents we’re going to miss predict very important outcomes
miss predict very important outcomes
miss predict very important outcomes like spending savings and investment so
like spending savings and investment so
like spending savings and investment so we need to replace the homo part of that
we need to replace the homo part of that
we need to replace the homo part of that assumption with a personae assumption
assumption with a personae assumption
assumption with a personae assumption that is the inclusion of representative
that is the inclusion of representative
that is the inclusion of representative agents of both genders and then
agents of both genders and then
agents of both genders and then we need to take that gender disagree
we need to take that gender disagree
we need to take that gender disagree gated behavior and incorporate it into
gated behavior and incorporate it into
gated behavior and incorporate it into our standard macroeconomic models so
our standard macroeconomic models so
our standard macroeconomic models so some very preliminary work in this area
some very preliminary work in this area
some very preliminary work in this area is being done now with funding from the
is being done now with funding from the
is being done now with funding from the William and Flora Hewlett Foundation and
William and Flora Hewlett Foundation and
William and Flora Hewlett Foundation and coordinated at American University so
coordinated at American University so
coordinated at American University so what we need to do then is to replace
what we need to do then is to replace
what we need to do then is to replace that assumption of Homo economicus with
that assumption of Homo economicus with
that assumption of Homo economicus with an assumption of personae persons
an assumption of personae persons
an assumption of personae persons sociales social and then we need to
sociales social and then we need to
sociales social and then we need to adjust the way that we teach economics
adjust the way that we teach economics
adjust the way that we teach economics accordingly so this doesn’t mean that we
accordingly so this doesn’t mean that we
accordingly so this doesn’t mean that we have to throw out every standard model
have to throw out every standard model
have to throw out every standard model based on Homo economicus but it does
based on Homo economicus but it does
based on Homo economicus but it does mean that we need to give much more
mean that we need to give much more
mean that we need to give much more attention to other approaches approaches
attention to other approaches approaches
attention to other approaches approaches that focus on cognitive limitations and
that focus on cognitive limitations and
that focus on cognitive limitations and also on gender differences and we need
also on gender differences and we need
also on gender differences and we need to – sorry incorporate also current
to – sorry incorporate also current
to – sorry incorporate also current research most recent research on
research most recent research on
research most recent research on behavioral economics evolutionary
behavioral economics evolutionary
behavioral economics evolutionary economics and feminist economics I have
economics and feminist economics I have
economics and feminist economics I have a former graduate student who’d like to
a former graduate student who’d like to
a former graduate student who’d like to tell me that if the only tool you have
tell me that if the only tool you have
tell me that if the only tool you have is a hammer then every problem you see
is a hammer then every problem you see
is a hammer then every problem you see looks like a nail and what we need to do
looks like a nail and what we need to do
looks like a nail and what we need to do is we need to give our students a much
is we need to give our students a much
is we need to give our students a much broader set of tools so that they can
broader set of tools so that they can
broader set of tools so that they can approach a much broader set of problems
approach a much broader set of problems
approach a much broader set of problems appropriately and if we do that we might
appropriately and if we do that we might
appropriately and if we do that we might even be able to make economics less
even be able to make economics less
even be able to make economics less dismal thank
”
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