“THERE ARE IDIOTS. Look around.” So began a famous economics paper by Larry Summers — a lauded academic before he became US Treasury secretary. It is perhaps the most concise expression of behavioural economics, the branch of economics that tries to take psychology seriously.
Behavioural economics is appealing not only because it is realistic but also because it is vastly more charming than the traditional variety. Championed by economists such as Richard Thaler (co-author of Nudge and author of a new book, Misbehaving ) and psychologists such as Nobel laureate Daniel Kahneman (author of Thinking, Fast and Slow), it has triumphed in the “smart thinking” section of the bookshop and exerted increasing influence in academia.
It can be hard to turn psychological insights into rigorous academic models, and even harder to turn them into good policy. But there is at least one dramatic success for behavioural economics — the way that it has shaped pensions. At a recent Financial Times event, Professor Thaler rightly celebrated this as the field’s greatest triumph.