hen the Federal Reserve Bank of Boston invited the leading behavioral economists to a Cape Cod golf resort this month to make their case, it was plainly a signal moment. "It has the feeling of being summoned by the king," said Colin F. Camerer, a star behaviorist who teaches at the California Institute of Technology. "Sort of like: `I understand you're the finest lute player in the region. Will you come and play for me?' "
Until the last few years, behavioral economics — which blends psychology, economics and, increasingly, neuroscience to argue that emotion plays a huge role in how people make economic decisions — was an extremely tight-knit group. It had little influence and few practitioners. One economist at the bank's conference recalled an Alaska kayaking trip that Mr. Camerer took with another prominent behaviorist a decade ago. "If that kayak had flipped," he said, "half the field would have been eradicated."
But the field has grown, as has its influence. In 1996, Alan Greenspan's warning of "irrational exuberance" acknowledged, as the behaviorists do, that the average investor is hardly the superrational "homo economicus" that mainstream economists depict. In 2001, the young behaviorist Matthew Rabin won the John Bates Clark Medal; last fall, the psychologist Daniel Kahneman, a forefather of behavioral economics, was awarded the Nobel in economic science.
And so it was that the Boston Fed summoned the behaviorists to the Wequassett Inn in Chatham, Mass. The conference was given the quaint title "How Humans Behave," as if monetary policymakers had suddenly realized that, lo and behold, on the other end of all that policy are actual people. The collection of mainstream economists and central bankers would be the highest-level audience the behaviorists had ever enjoyed, the best chance yet for their new thinking to hit the bloodstream.
From the outset the mood was civil, especially considering that the behaviorists are essentially calling for an end to economics as we know it. (As one economist grumbled, "What you have to understand is that behavioral economics is attacking the foundation of what welfare economics is built on.") So it was not surprising that some Fed elders seemed wary, as if they were at a family reunion and welcoming a distant cousin about whom they had heard only puzzling rumors. But with the economy stuck in a condition between dismal and desperate, the behaviorists' timing could not have been better.
"All our models and forecasts say we'll see a better second half," Cathy E. Minehan, president of the Boston Fed, said in her opening address. "But we said that last year. Now don't get me wrong: mathematical models are wonderful tools. But are there ways this process can be done better? Can we inform the policymaker from 50,000 feet with wisdom gained on the ground, in the human brain, or in the way humans make decisions and organize themselves? I hope so."
Ms. Minehan and her colleagues were particularly hoping to learn why Americans save too little, acquire too much expensive debt and perform such achingly self-destructive feats of portfolio management. The behaviorists, for their part, were put in a tight spot: eager to prove themselves but leery of overpromising. "Virtually everyone doing behavioral economics agrees we should go slowly in advocating policy change," Mr. Camerer wrote in the paper he presented. "Our thinking was also not designed to precisely answer questions about welfare and policy, but this is a good time in the intellectual history of the field to say something."
Eldar Shafir, who teaches psychology and public affairs at Princeton, began with a behavioral economics primer. It was full of the anomalies the field is known for, including the popular "6 jam-vs.-24 jam" experiment. In an upscale grocery story, researchers set up a tasting booth first with 6 jars of jams, and later with 24 jars. In the first case, 40 percent of the customers stopped to taste and 30 percent bought; in the second, 60 percent tasted but only 3 percent bought. The point is that too many options can flummox a consumer — and if 24 jars of jam pose a problem, imagine what 8,000 mutual funds can do. Standard economics would argue that people are better off with more options. But behavioral economics argues that people behave less like mathematical models than like — well, people.
