Everything wrong with Economics (in academia)

There has been a lot of talk in this sub about how capitalism fails to deliver goods. But there is another side to these stories, and that is the way the academic world has failed to deliver the goods. Much of what follows is based on a paper from three Nobel Prize winning economists titled "Misbehaving: The Making of Behavioral Economics."<br><br>One of the major criticisms of economics is that it makes broad assumptions about the way people behave. For instance, the idea that given the choice between two things people will always choose the one that makes them better off is the foundation of much of economics. But that's not to say that assumptions aren't useful, in fact all of science is founded on assumptions and hypothetical situations. But Economics does not account for something that Psychologists call Loss Aversion. The basic idea is that if you give someone two options, one is to give them $100, and the other is to give them $200 but then take away $100, they're not going to act the same way. They'll probably choose the first option, which is a pretty reasonable choice. I'd take the $100 and get out of there before things take a turn for the worse. So behavioral economists decided that they would test these assumptions.<br><br>The problem is that they have been largely ignored. In fact Richard Thaler, who wrote the paper I mentioned earlier, was rejected from almost every university because no one took Behavioral Economics seriously. So why does this matter? Well if we collectively better understand how people behave then we can make better choices for them, and the government can create policies that actually help people, rather than policies that help theoretically ideal humans.<br><br>For instance, if you give people a 401(k) plan and you automatically enroll them in it, they will contribute more because they don't want to lose money. Though the way these plans work now, you have to opt in, and people will just choose not to lose money and never opt in. This is the choice that makes them better off, but they chose not to do it because they don't want to lose money. This is a direct example of how Economists are wrong about human behavior, and how that lack of understanding leads to policies that don't help people.<br><br>Another example of this is called the Ultimatum Game. The basic idea is that two people will divide a pot of money. One person will give the other person an offer, and the other person can accept or reject it. If they accept, they get the money offered to them and the other person gets the difference. If they reject it, they get nothing and the other person gets nothing as well. In theory the second person should always accept because that way they get some money and the first person gets some money. But in reality people reject the offer when the split is around 70/30 in favor of the first person. So in theory, we would have taken the $30 and been happy with it, in reality we would reject it because we don't want to lose money. Again, human behavior isn't as simple as "people will choose what makes them better off" as much as we would like it to be. <br><br>Also, to my knowledge the field of economics does not take into account the way people's perceptions are colored by their surroundings. A classic example of this is Daniel Kahneman's story about how his shower is either very hot or very cold, but he chooses to take a shower in cold water so that way he can perceive the warm water as more pleasurable. In reality, the water isn't that much warmer than usual, but his brain is tricked into thinking it is. So when it comes to things like GDP per-capita, we would say that the human experience is better in wealthy countries, but really we don't know that because that assumes that people have the same base line across countries. <br><br>These are just a few of the reasons why behavioral economists say that we don't fully understand how people act, and that our economic models are flawed. With a better understanding of human behavior, we can make better choices for people and create policies that actually help improve their lives.<br><br>Edit: There's a lot of great discussion in here, especially regarding the flaw of assuming people are "irrational" when they don't make the choices that are best for them. The point that I didn't make strongly enough is that these assumptions are supposed to be hypothetical, but in reality they're used to govern real world policy making.