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Among the behaviorists, there is the common sentiment that economics has been ruined by math. "Neoclassical economists came along in the mid-19th century and wanted to mathematize the new science of economics," said George Loewenstein, a professor at Carnegie Mellon University. "They couldn't include `the passions,' or emotions, in their models, because they were too unruly, too complex. But they also thought that the emotions were unknowable."
Mr. Loewenstein described how he and his colleagues want to prove otherwise — that not only are emotions not unknowable but that when it comes to money, they may be more powerful than math. This is why Mr. Loewenstein studies how people make financial choices while they are experiencing various degrees of sadness, hunger and sexual arousal. This is why Colin Camerer has become a student of brain imaging, trying to identify where a subject's brain lights up when, for instance, a lowball offer leaves him disgusted.
But the most radical idea presented at the conference belonged to Richard H. Thaler. His paper, written with the legal scholar Cass R. Sunstein, was called "Libertarian Paternalism Is Not an Oxymoron." Leonine and youthful at 57, Mr. Thaler, who teaches at the University of Chicago, is widely considered the founder of behavioral economics (and some say, its next Nobel winner). He is more confident and, accordingly, more prescriptive than his younger colleagues.
"Behavioral economics offers powerful tools to achieve policy goals," he told the conference. "And libertarian paternalism is an attractive approach to solving policy problems. What else? I think the only other alternative is inept neglect."
Mr. Thaler has concluded that too many people, no matter how educated or vigilant, are poor planners, inconsistent savers and haphazard investors. His solution: public and private institutions should gently steer individuals toward more enlightened choices. That is, they must be saved from themselves. Mr. Thaler's most concrete idea is Save More Tomorrow (SMarT), a savings plan whereby employees pledge a share of their future salary increases to a retirement account. In test cases, the plan has proved remarkably successful.
"This was not pulled out of thin air," Mr. Thaler said. "It was done using what I call first-grade psychology. We knew this was going to work, no question." Indeed, the SMarT plan takes advantage of behavioral economics' basic tenets: "loss aversion" (people fear loss because it causes them far more pain than the pleasure they receive from gain; but since the SMarT plan covers a future raise, they never feel its loss); "status-quo bias" (since people are reluctant to change, the change can be made for them); and "mental accounting" (people have a pressing need to direct different streams of money into different "accounts").
Mr. Thaler was followed by David I. Laibson, a young Harvard behaviorist who also endorsed a paternalistic approach. "There are two enormous travesties in the financial services industry," Mr. Laibson said. "One, people have too much of their own company's stock, and two, mutual-fund management fees are too high." His solution to the first problem: an automatic asset reallocation to keep an employee from holding more than 20 percent of his portfolio in company stock.
"People could opt out," he said. "If you're crazy enough to do that, fine, that's your right, but we'd certainly push them down." His solution to the second problem: warning labels about management fees, modeled after the surgeon general's cigarette warning.
Mr. Laibson's and Mr. Thaler's proposals were warmly received by the bankers and mainstream economists. If this is behavioral economics, what's not to like? The proposals seemed to be sound and not particularly invasive solutions to Americans' troubling money habits. All the earlier talk of sexual-arousal studies and brain imaging may have left them flat; but here were some real action items.
The behaviorists, most of whom are hardcore empiricists, even felt comfortable enough to declare their own research wish lists. Dan Ariely of the Massachusetts Institute of Technology trolled the room for a good contact at the Internal Revenue Service (he wants to study the psychology of tax cheats). Duncan J. Watts, a sociologist at Columbia University, half-jokingly requested access to the phone and e-mail records of all Federal Reserve employees (he is looking for good data to better understand how organizations behave).
The warm reception didn't mean wholesale conversion. When Jeffrey C. Fuhrer, the Boston Fed's chief economist, was asked about Mr. Camerer's desire for a new Economics 101 textbook, one that puts behaviorism at the center and mathematical modeling on the fringe, he responded: "Yeah, that's his `I Have a Dream' speech. I think that's still weeks off."
Still, Mr. Fuhrer, who organized the conference, was delighted with its outcome: "I think we would have been crazy to expect we'd walk out of this conference and say, `O.K., we're going to our next meeting, and now we know what to do because these guys told us.' But having had these conversations, where people look at economics from a different viewpoint, will we think a little differently about how we do research and exactly which people we might talk to? You bet we will."
They may have little choice. As Frederick S. Breimyer, chief economist of the State Street Corporation in Boston, said, "We're looking outside the box because the box we've been looking inside is empty."
