Behavioral Economics - Why We Need Experiments


In the field of behavioral economics (the study of how people make economic decisions) it is common to do experiments. Theory is not enough, and sometimes the hypothesis is proven entirely incorrect. These kinds of experiments tend to produce readily understandable results that can actually be applied to real life situations immediately. In fact, they are sometimes designed to solve specific real problems. Let's look at an example.

Economists Uri Gneezy and Aldo Rustichini heard about a common problem at day-care centers. It is that some parents are late picking up their children at the end of the day. That means not only is there often a worried child or two waiting anxiously, but there is also an irritated staff member or two who have to stay late. The solution the economists suggested was to fine parents.

This might be considered a classic solution for economists. It provides an incentive to alter behavior. It's a negative incentive in this case, but it seems very likely that, if forced to pay a fine, parents would be late less often. The results were more interesting than that though.

In the weeks before starting the fine, Gneezy and Rustichini just counted how often parents were late at ten day-care centers in Israel. There were eight late arrivals each week on average. Then the fine was enacted at the centers. Parents would have to pay $3 each time they were late, and the charge would be added to the monthly bill, which averaged $380.

The result? Soon there were 20 late arrivals weekly, more than twice the previous amount. As Steven D. Levitt and Stephen J. Dubner, in their book Freakonomics, put it, the fine "substituted an economic incentive (the $3 penalty) for a moral incentive" (the guilt felt by parents for showing up late). That $3 essentially gave parents "permission" to be late.

Of course, it is a safe bet that if the fine was high enough it would work, but we can't always guess what nature of incentive or what level will work. We might be surprised and have our assumptions disproven. This is why experiments like this are done in the filed of behavioral economics. More and more it is shown that the theories about economic decision-making are only partly true, and that our actions do not proceed from pure logic--even in the marketplace.

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