An interesting interview. Here are some snippets…
It turns out that the human mind is very complicated. Economic theory likes to reduce human behaviour to a canonical form, the structure has been, ever since Samuelson wrote this a half century ago, that people want to maximise their consumption. All they want to do is consume goods; they don’t care about anyone else. There’s neither benevolence nor malevolence. All they care about is eating or getting goods and they want to smooth it, they described it in terms of so-called utility functions through their lifetime and that’s it. That is such an elegant simple model, but it’s too simple and if you look at what psychology shows, the mind is the product of human evolution and it has lots of different patterns of behaviour. The discoveries that psychologists make to economics are manifold.
I think that the economics profession suffers from physics-envy. I really do. We all wish we could be Einstein. It’s too strong a model, we can’t all develop the theory of relativity. The world of people isn’t like that. When you look at what happens for example in a financial crisis, you’ve got to get immersed in a lot of detail. It doesn’t become understandable by abstract economic reasoning. This means you have to look at an impression of what’s driving people, what’s on their minds, what they don’t know, what the lawyers did with the contracts, what the people are assuming the government might do if such and such happens. It involves a lot of real world thinking which doesn’t fit with the Einstein model.
We are learning amazing things about human behaviour, we could also add neuroscience. It seems to me that the profession advances by bringing in insights from other professions. And the place where 20 years ago I would least have expected it is the medical school. But you know people from the medical school are now coming into economic seminars because they go back to their lab and they can do an MRI or single-neuron study and see what’s happening inside the brain. It used to be that we had no insight, we believed in what Samuelson called ‘revealed preference’. We will look at people’s functions of their mind by seeing what they do in their economic actions and there’s no other way. But now we can look inside the brain and see something. One thing about behavioural economics incorporating neuro-economics is that it’s going to be a very productive field in the next twenty years and it’s going to change our thinking about the economy.
[E]conomists’ analysis should inform better public policy and reduce the frequency of crashes. We don’t want to have these crashes in the first place. And so they will be unsung heroes who saw something coming and averted it. It’s just like the guy who designed the traffic lights and he prevents accidents. You don’t go to this person thankfully saying ‘you prevented my accident’, you don’t even know that the person prevented it. So that’s the kind of world where economists will fade into the background, just like the street planners in the city, and yet be doing good things.