Behavioral Economics - Why We Need Experiments
By Steve Gillman
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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