Two articles worth noting, albeit for very different reasons. The first is David Ignatius’s column in today’s Washington Post and the second is a Wall Street Journal article on the impact of the current fiscal “stuff” on Congressional redistricting.
David Ignatius turns to behavioral economics and the work of Daniel Kahnemann to help explain how we wound up in the current financial bog. Kahnemann and his collaborator Amos Tversky developed prospect theory to help explain how people make real decisions in the real world. They found that people are not “rational actors” carefully and consistently weighing options. Instead we treat gains and losses differently, make choices based on how options are described without paying enough attention to the underlying probabilities in the statements, and generally make decisions based on how we feel rather than on how the data indicate we should act.
The piece begs two questions. First, what can those constructing and promoting the rescue packages learn from behavioral economics? If one of the goals is to have us believe we are more economically secure and get us to believe that borrowing, lending and spending money is a good idea, the incentive structure needs to take into account how we feel about money. The legislation needs to recognize that we are not rational decision makers with our own resources – indeed, approaching policy from the perspective of prospect theory might have significant implications for the cost of the bill. A second question is how policymakers themselves are processing the data. The President and his advisors, senior legislators, and all those advising all those people, are themselves just as irrational as the rest of us. Behavior economics applies to people, including those in power. What, then, can prospect theory tell us about how those making the policies are processing information? And can those decision makers use those theories to test their own work and thus improve it?
A second article, on a wholly different topic, is also worth noting. A piece in Friday’s Wall Street Journal speculates about the effects of the economic muck on Congressional races in 2012. The 2012 campaigns will of course be based on Congressional districts that are drawn based on the 2010 census. When the economy was humming along people were moving from places like New York to places like Florida. But with the economy slowing people are moving less (and those who are moving, are moving differently). As a result New York may lose only one House seat rather than the projected two, while Florida may gain just one. This matters not only for who is in the House but also for the Electoral College map that will decide the 2012 Presidential election. Given that most members of the House are currently simultaneously running to get re-elected by their current constituents in 2010 and also running for the votes of their potential constituents in 2012 (to say nothing of the impact on those already running for President) this unexpected side-effect of the economic imbroglio is worth paying attention to.
