We're Only Human

Stephen J. Dubner's article Calculating the Irrational in Economics in today's issue of The New York Times was refreshing in that it showed a glimmer of light at the end of the tunnel with regard to the use of common sense in economic policy.

As traders boo'ed interest rates that didn't dip low enough, it was also apparent that even the lowest interest rates don't affect the economy like they used to. When what you've always done no longer works, it's time to get purple and do something remarkable, so the economists decided to hold a conference called "How Humans Behave."

Although to me it's remarkable that the makers of fiscal and monetary policy have rarely considered their views, Behaviorists have long been a minority among economists.There is a perception that behavioral science is inexact at best, since it deals with emotions and patterns which are not easily quantified. In today's article, Dubner wrote:

"Among the behaviorists, there is the common sentiment that economics has been ruined by math. "Neoclassical economists came along in the mid-19th century and wanted to mathematize the new science of economics," said George Loewenstein, a professor at Carnegie Mellon University. "They couldn't include `the passions,' or emotions, in their models, because they were too unruly, too complex. But they also thought that the emotions were unknowable."

Mr. Loewenstein described how he and his colleagues want to prove otherwise — that not only are emotions not unknowable but that when it comes to money, they may be more powerful than math. This is why Mr. Loewenstein studies how people make financial choices while they are experiencing various degrees of sadness, hunger and sexual arousal. This is why Colin Camerer has become a student of brain imaging, trying to identify where a subject's brain lights up when, for instance, a lowball offer leaves him disgusted. "

Although the merits of applying behavioral research to fiscal and monetary policy seem painfully obvious to marketers and those who study customer behavior, the fact that the economists are even listening to behavioral theories is a significant step. Although no new text books will be cropping up soon espousing behavioral theories, necessity, in this case, America's "illogical" lack of planned response to plummeting interest rates has forced traditional economists to try even this to restore the country to financial stability. Kind of like going back and reading the directions, in this case, the basics of consumer behavior.