Why Behavioural Economics Will Not Save the World

The award of this year’s Nobel Memorial Prize in Economic Sciences to Richard Thaler has brought renewed attention to the field of behavioural economics.¹ Four earlier Nobels have been given to scholars who have integrated insights about human behaviour from psychology into economics: Herbert A Simon (1978), Maurice Allais (1988), Daniel Kahneman (2002) and Robert Shiller, Eugene F Fama and Lars Peter Hansen (2013). This shows that there is a recognition within the discipline of the contribution that the behavioural approach has made to the understanding of economic phenomena. However, the extent of this contribution is often exaggerated, and behavioural economics is presented as the panacea that will cure economics of all its problems.

In this article, I describe how the behavioural approach is different from standard economic models and then argue that, while the shortcomings of the standard models pointed out by this approach are important, the models that are offered as alternatives do not depart from the standard ones in any fundamental way. Many of the problems with these models that came to light in the aftermath of the 2008 financial crisis indicate a need for a much more radical change in the way economic theory is done. I end by highlighting one approach that has the potential to bring about this change.