During our annual summer sojourn in Wisconsin, we typically spend an afternoon parasailing. It’s nice to be out on the water, and the view of Green Bay from 300 feet up is spectacular. My wife is not allowed to join us; she might be tempted to cut the cord connecting the boat and the parachute and send me off to Canada.
On this year’s excursion, we were joined by a college-aged couple. It was the young man’s first time parasailing, and it became apparent during our conversation that his girlfriend had talked him into the experience. As luck would have it, it was a windy day and the seas were choppy. By the end of the trip, this fellow was as green as his girlfriend’s sun dress. I am not sure the relationship survived the evening.
As the story illustrates, people often make poor choices. In that regard, the parasailing excursion dovetailed with a book I read on this summer’s vacation: “Misbehaving,” by Richard Thaler. Thaler is a behavioral economist, a designation once met with ridicule within our discipline. But the influence these scientists have had over our profession and public policy during the past twenty years is hard to overstate.
We would do well to heed the teaching of behavioralists as we craft solutions to some of today’s thorniest problems. In areas such as finance and health care, there is compelling evidence that relying completely on free choice leads to poor results for both individuals and societies. In these cases, subtle intervention can improve market function and market outcomes.
At the University of Chicago, my freshman economics course was based on the suppositions that people behave rationally, process information well and can be trusted to make individual choices that aggregate to the collective good. I recall being curious about this progression, having witnessed plenty of less-than-intelligent behavior (some of it my own). But these assumptions were used as the basis for models of how markets work. And as a newcomer to the subject, I was not going to argue with my professor during the first week of class.