How a popular strand of economics lost its shine
If 2008 marked the rise of behavioural economics, 2023 marks a year of reckoning. The Gino-Colada affair has blown the lid off a simmering crisis in the field
The global financial crash of 2008 was as much a crisis of economics as it was an economic crisis. Economists’ inability to foresee the crisis sowed doubts about their craft. As conventional theories lost lustre, a new branch of economics gained popularity. Combining insights from psychology and economics, behavioural economics offered a fresh approach to complex problems. It helped that one of the few finance experts to have predicted the crash, Robert Shiller, was a major proponent of behavioural finance.
Shiller held that herd behaviour rather than rational calculations often drove financial investments, and went on to win the Nobel Prize in 2013. Another future Nobel Prize winner, Richard Thaler, proposed that policymakers should prod fallible citizens to make better choices in his 2008 book Nudge. Since people don’t always make decisions rationally, they could be “nudged” through simple fixes — say by replacing sugar candies with low-carb cookies in storefronts. The United States and the United Kingdom governments soon set up “nudge units” to incorporate such fixes in policymaking.
Some behavioural scientists became uneasy with the turn their field was taking. Three of them — Uri Simonsohn, Joseph Simmons, and Leif Nelson — launched the Data Colada blog in 2013 to assess the validity and rigour of research in their field. Two years ago, the bloggers detected evidence of data tampering in a research paper by Francesca Gino, a Harvard Business School professor. The blame fell on one of Gino’s co-authors, (another renowned behavioural economist Dan Ariely). Gino praised the bloggers for their “talent and courage” in uncovering “serious anomalies”. The paper was retracted.
Meanwhile, the bloggers found other discrepancies in Gino’s research and alerted her university. Harvard conducted its own investigation before suspending her in June. Around the same time, the Colada team went public with their findings. Gino alleged a conspiracy to destroy her reputation, and has slapped a $25 million defamation lawsuit against Harvard and the bloggers.
If 2008 marked the rise of behavioural economics, 2023 marks a year of reckoning. The Gino-Colada affair has blown the lid off a simmering crisis in the field. Several famous studies have either been retracted or disputed in recent years. When other scholars tried replicating those landmark studies, they failed to get similar results. The “replication crisis”, as scholars term it, is not often driven by fraud. In many instances, the original studies were based on small samples, and hence a few observations had an outsized influence on the final results. What seemed like a novel insight was exposed as a fluke once the experiment was repeated.
The structure of academic publishing is such that a fluke often has a greater chance of being published than a boring result that validates earlier theories. Scholars refer to this phenomenon as “publication bias”, and it is prevalent in almost all fields. Yet, the extent of the bias may be relatively higher in behavioural economics, critics argue.
Since people’s behaviour is shaped by their circumstances, repeat experiments — conducted in a different time and place — often produce divergent results. This also means that nudges tend to have a much lower impact in the real world than expected. A 2020 study of 126 such policy interventions covering 23 million Americans found that the average impact of such nudges (1.4 percentage points) was much lower than in comparable academic studies (8.7 percentage points).
The most damning critique of behavioural economics comes from two former nudge advocates, Nick Chater and George Loewenstein. Nudge practitioners may be unwittingly playing into the hands of corporate lobbyists by emphasising individual responsibilities over systemic changes, the duo argued in a working paper last year. For instance, “green nudges” to lower the carbon footprint of individuals end up undermining real reforms without having a significant impact on emissions. Emission control regulations or carbon taxes are more meaningful ways to combat the climate crisis. Such systemic measures are opposed by corporate lobbyists, who are keen to emphasise individual initiatives.
Chater and Loewenstein pointed out that the idea of a personal carbon footprint calculator first came from an oil company, British Petroleum (BP). BP ran an ad campaign in the early 2000s, focused on helping people bring down their carbon footprints. The campaign was a stupendous success, with media organisations and government agencies creating their own calculators to help people measure and lower their carbon footprints.
The ad campaign managed to reframe the fight against the climate crisis as a matter of individual responsibility, deflecting attention from polluting industries. Behavioural scientists “jumped aboard by testing, and advancing the implementation of, a variety of green energy nudges”, the duo wrote, acknowledging their own role in driving such misguided efforts.
“An influential line of thinking in behavioural science, to which the two authors have long subscribed, is that many of society’s most pressing problems can be addressed cheaply and effectively at the level of the individual, without modifying the system in which the individual operates,” the duo wrote. “We now believe this was a mistake.”
Behavioural nudges can be effective in policymaking when they are used to design better systemic solutions, Chater and Loewenstein conclude. In other words, nudges should be considered as complements to major systemic changes, not as their substitutes. There aren’t any silver bullets in policymaking.
Pramit Bhattacharya is a Chennai-based journalist. The views expressed are personal
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