T
he “Anomalies” columns served the purpose of showing the economics profession that there were lots of facts that did not line up with the traditional models. They helped establish the case for adopting a new way of doing economics based on Humans rather than Econs. But economics is a big discipline, and I was one lazy man. To create a new field would require a team. How could I do anything to encourage others to join the fun? There was no field manual available to consult on how to make that happen.Of course, new fields emerge all the time, and they usually do so without any coordination. Someone writes a paper on a new topic that opens up new lines of inquiry, such as game theory in the 1940s. Soon others read about it, think that the topic seems interesting, and decide to try to make a contribution of their own. If things go well, enough people are soon doing research in the area to start having conferences on the topic, and eventually a journal dedicated to the subject matter emerges. But this is a slow process, and I was yearning for people to talk to besides Amos and Danny. In the late 1980s, there were really just three people besides me who thought of themselves as behavioral economists. One was George Loewenstein, whose work was mentioned in the section on self-control. Another was Robert Shiller, who appeared above and plays a starring role in the next section, and the third was Colin Camerer.
I first met Colin when he was on the academic job market. At that point he had picked up an MBA and was nearly done with a PhD from the University of Chicago, and he had not yet turned twenty-one. Colin has made many important contributions to behavioral economics. Two stand out. First, he more or less invented the field of behavioral game theory, the study of how people actually play games, as opposed to standard game theory, which studies how Econs would play games if they knew that everyone else playing was also an Econ. More recently, he has been at the forefront of neuro-economics, which uses techniques such as brain imaging to learn more about how people make decisions.
Colin has many talents. While still a teenager in grad school, he formed a record company and signed the famously satirical punk band called the Dead Milkmen. One of their “hits” was “Watching Scotty Die.” Colin is also a skilled mimic. His Gene Fama and Charlie Plott are particularly good. Personally, I think his Thaler is only so-so.
Although the additions of Camerer, Loewenstein, and Shiller to the field were all important milestones, I knew that behavioral economics as an academic enterprise would flounder unless it could acquire a critical mass of researchers with a variety of research skills. Fortunately, there was someone else who had the same goal, and could also contribute some resources. That man was Eric Wanner.
E
ric Wanner was a program officer at the Alfred P. Sloan Foundation when he took an interest in combining psychology and economics. Eric is a psychologist by training, but I think he is an economist by predilection, and he relished the chance to see if these two fields could somehow find common ground. He sought out the advice of Amos and Danny about how he could help make this happen. Danny, who prides himself on being a pessimist, remembers telling Eric that he “could not see any way to honestly spend much money on this endeavor,” but they both suggested to Eric that he talk to me. After Eric and I met at the Sloan Foundation in New York, Eric convinced the foundation to provide the funding to support my year in Vancouver visiting Danny.Soon after I returned to Cornell, Eric left Sloan to become the president of the Russell Sage Foundation, also located in New York. Although behavioral economics was not at the core of the stated mission of the foundation—which is to address important social policy issues such as poverty and immigration—the board was sufficiently anxious to hire Eric that they agreed to let him bring his behavioral economics agenda along with him. Naturally, he had no more idea of how to go about nurturing a new field than I did, but we put our heads together and tried to figure it out on the fly.
Our first idea seemed like a good one at the time. Since the goal was to combine economics and psychology, we decided to organize occasional meetings of psychologists and economists and hope that sparks would fly. We invited three groups of people: distinguished psychologists who were willing to endure a day spent talking to economists, some senior economists who were known to have an open mind about new approaches to doing economics, and the few hard-core folks who were engaged in doing research.
Eric is a persuasive guy, and as a result of his charm and arm-twisting, the collection of psychologists who showed up at our initial meeting was truly astonishing. We had not just Amos and Danny, but also Walter Mischel, of the Oreo and marshmallow experiment fame, Leon Festinger, who formulated the idea of cognitive dissonance, and Stanley Schachter, one of the pioneers of the study of emotions. Together they were the psychology version of the dream team. Some of the friendly economists who agreed to participate were also an all-star cast: George Akerlof, William Baumol, Tom Schelling, and Richard Zeckhauser. The hard-core group was Colin, George, Bob, and me. Eric also invited Larry Summers to come to the inaugural meeting, but Larry couldn’t come and suggested inviting one of his recent students, Andrei Shleifer. It was at that meeting that I first met the rambunctious Andrei, who would later become my collaborator. Jon Elster, the eclectic Norwegian philosopher who seems to be knowledgeable in nearly every intellectual domain, rounded out the group.
Given the amazing lineup, the couple meetings we had did not turn out to be very productive. I have two vivid memories. One is of Leon Festinger making wry wisecracks, interrupted only by his frequent trips to the foundation’s patio for a smoking break. The other was a plea from William Baumol for us to move beyond the discovery of anomalies. He thought that our anomaly-mining, as he called the activity, had served its purpose, but that we now had to move on to a more constructive agenda. But he had no suggestion about what that constructive agenda should be.
I think the real problem we faced was a general one that I have learned with experience. Interdisciplinary meetings, especially those with high- level agendas (reduce poverty, solve climate change) tend to be disappointing, even when the attendees are luminaries, because academics don’t like to talk about research in the abstract—they want to see actual scientific results. But if scientists from one field start presenting their research findings in the manner that the colleagues in their field expect, the scientists from other disciplines are soon overwhelmed by technical details they do not understand, or bored by theoretical exercises they find pointless.*
Whether or not my gloomy assessment of interdisciplinary conferences is correct, the presence and enthusiastic participation of the collection of all-star psychologists at these meetings, held at the Russell Sage Foundation’s office in New York, were both encouraging and misleading regarding the future of the field—encouraging because such luminaries were taking the time to come and seemed to think that the mission was both worthy and sensible, but misleading because they reinforced the belief we all held at the time, which was that if there were to be a successful field called behavioral economics, it would have to be a truly interdisciplinary effort with psychologists and economists working together. It was
natural for Amos, Danny, and I to think that, because we had learned so much from one another and had begun to produce actual joint research. That turned out to be a poor forecast. Although there are a handful of psychologists who have formed successful collaborations with economists over the years, Drazen Prelec and Eldar Shafir being notable examples, behavioral economics has turned out to be primarily a field in which economists read the work of psychologists and then go about their business of doing research independently.† One of our early participants, Stanley Schachter, is a case in point. He tried his hand at doing some research on the psychology of the stock market, but grew frustrated with the reactions he got from the referees at mainstream finance and economics journals and eventually abandoned the research program.
There are several possible reasons why psychologists might have failed to engage. First, since few have any attachment to the rational choice model, studying departures from it is not considered inherently interesting. A typical reaction would be: “Of course people pay attention to sunk costs! Who would have thought otherwise?” Second, the psychology that behavioral economists have ended up using is not considered cutting- edge to psychologists. If psychologists started using supply and demand curves in their research papers, economists would not find the idea very exciting. Finally, for some reason the study of “applied” problems in psychology has traditionally been considered a low-status activity. Studying the reasons why people fall into debt or drop out of school has just not been the type of research that leads academic psychologists to fame and glory, with the notable exception of Robert Cialdini.
Furthermore, we behavioral economists have not been particularly successful in generating new psychology of our own, which might breed the kind of cross-fertilization that we originally expected. Most of the advances in the field have been to figure out how best to modify the tools of economics to accommodate Humans as well as Econs, rather than discovering new insights about behavior. Of the emerging group of economists that have become the leaders of the field, only George Loewenstein has really created much new psychology. Although trained as an economist, George is really a talented psychologist as well, a fact that might be partially attributed to good genes. His middle initial F stands for Freud; Sigmund was his great-grandfather.
A
lthough this effort to get economists and psychologists working together did not succeed, Eric Wanner remained committed to helping foster the field, even if it consisted almost entirely of economists. The Russell Sage Foundation’s small size meant that it could not be the primary source of research funding if the field were to grow beyond a few hard-core members, so Eric convinced the board to continue to support the field in a limited and highly unusual way. And unlike the initial effort, it has been a huge success.Here is the plan Eric devised. In 1992, the foundation formed a group of researchers called the Behavioral Economics Roundtable, gave them a modest budget, and tasked them with the goal of fostering growth in the field. The initial members of the Roundtable were George Akerlof, Alan Blinder, Colin Camerer, Jon Elster, Danny Kahneman, George Loewenstein, Tom Schelling, Bob Shiller, Amos Tversky, and me, and within reason, we could spend the money we were given any way we wanted.
The Roundtable members decided that the most useful way to spend our limited budget (which began at $100,000 per year) was to foster and encourage the entry of young scholars into the field. To do this, we organized two-week intensive training programs for graduate students to be held during the summer. No university was then teaching a graduate course in behavioral economics, so this program would be a way for students from all over the world to learn about the field. These two-week programs were officially called the Russell Sage Foundation Summer Institutes in Behavioral Economics, but from the beginning everyone referred to them as the Russell Sage summer camps.
The first summer camp was held in Berkeley in the summer of 1994. Colin, Danny, and I were the organizers, with several other Roundtable members joining for a few days as faculty members. We also had some guest stars, such as Ken Arrow, Lee Ross (a social psychologist), and Charlie Plott. In the spirit of encouraging young scholars to join the field, we also invited two economists who had received their degrees quite recently to participate: Ernst Fehr and Matthew Rabin. Both had independently decided to take up careers in behavioral economics.
Ernst Fehr is the most aptly named economist I know. If you had to think of a single adjective to describe him it would be “earnest,” and the topic that has interested him most is fairness. An Austrian by birth, Ernst has become a central figure in the behavioral economics movement in Europe, with a base at the University of Zürich in Switzerland. Like Colin, he has also become a prominent practitioner of neuro-economics.
The first paper by Fehr that captured our attention was experimental. He and his coauthors showed that in a laboratory setting, “firms” that elected to pay more than the minimum wage were rewarded with higher effort levels by their “workers.” This result supported the idea, initially proposed by George Akerlof, that employment contracts could be viewed partially as a gift exchange. The theory is that if the employer treats the worker well, in terms of pay and working conditions, that gift will be reciprocated with higher effort levels and lower turnover, thus making the payment of above-market wages economically profitable.
In contrast, Matthew Rabin’s first behavioral paper was theoretical, and was at that time the most important theory paper in behavioral economics since “Prospect Theory.” His paper was the first serious attempt to develop a theory that could explain the apparently contradictory behavior observed in situations like the Ultimatum and Dictator Games. The contradiction is that people appear altruistic in the Dictator Game, giving away money to an anonymous stranger, but also seem to be mean to others who treat them unfairly in the Ultimatum Game. So, does increasing the happiness of someone else make us happier too, or does it make us less happy, perhaps because of envy? The answer, Rabin suggested, hinges on reciprocity. We are nice to people who treat us nicely and mean to people who treat us badly. The finding discussed earlier, that people act as “conditional cooperators,” is consistent with Rabin’s model.
Matthew is also a character. His normal attire is a tie-dyed T-shirt, of which he seems to have an infinite supply. He is also very funny. I was one of the referees who were asked to review his fairness paper when he submitted it for publication in the American Economic Review. I wrote an enthusiastic review supporting publication, but added, without providing any details, that I was disturbed that he had left out an important footnote that had appeared in an earlier draft. The footnote referred to the game economists refer to as “chicken,” in which the first person to concede to the other loses. Here was his footnote, which was restored in the published version: “While I will stick to the conventional name for this game, I note that it is extremely speciesist—there is little evidence that chickens are less brave than humans and other animals.”
So we had an all-star faculty lined up for our summer camp, plus the up-and-coming young guys, Fehr and Rabin. But having never done this before, we did not know whether anyone would apply. We sent an announcement to the chairs of the leading economics departments around the world and hoped someone would want to come. Fortunately, over 100 students applied, and the group of thirty that we picked was packed with the future stars of the field.
These summer camps have continued in alternate years ever since. After Danny and I grew too busy/tired/old/lazy to organize and participate in the entire two-week program, it was taken over by younger generations. For a while Colin and George organized it, and David Laibson and Matthew Rabin have run the last several camps.
One indicator of the success of these summer camps is that David was a student at the first one, so the group is becoming self-generating. Many of the other faculty members who participate now are also camp graduates. I should be clear that we make no claims about turning these young scholars into stars. For example, David Laibson had already graduated from MIT and taken a job at Harvard before he arrived at our summer camp. Others were also clearly stars in the making. Instead, the primary accomplishment of the summer camps was to increase the likelihood that some of the best young graduate students in the world would seriously consider the idea of becoming behavioral economists, and then to provide them with a network of like-minded economists they could talk to.
The talent level of the campers that first year is evidenced by the number who have gone on to fame. One was Sendhil Mullainathan, who had just completed his first year of graduate work at Harvard. I had gotten to know Sendhil when he was an undergraduate at Cornell, completing
degrees in economics, mathematics, and computer science in three years. It was not hard to see that he had the talent to do almost anything, and I tried my best to interest him in psychology and economics. Luckily for the field, my pitch worked, and it was his budding interest in behavioral economics that tipped him from computer science to economics for his graduate training. Among his other accomplishments, Sendhil founded the first behavioral economics nonprofit think tank, called ideas42. He, Matthew, and Colin have received a so-called “genius” award from the MacArthur Foundation.
Other notable first-year campers were Terry Odean, who essentially invented the field of individual investor behavior, Chip Heath, who with his brother Dan has published three successful management books, and two of my future coauthors, who will soon make their appearances in this book: Linda Babcock and Christine Jolls.
In the summer of 2014 we held our tenth summer camp, and I have yet to miss one. There are now about 300 graduates, many holding positions at top universities around the world. It is largely the research produced by those summer camp graduates that has turned behavioral economics from a quirky cult activity to a vibrant part of mainstream economics. They all can thank Eric Wanner for helping them get started. He is the behavioral economics’ founding funder.
________________
* There are some exceptions to this generalization, such as neuroscience, where scientists from many different fields have productively worked together, but in that case they