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Behavioral Economics – The ruse for government intervention?

There has been a lot of talk lately about behavioral economics – BE. Specifically in regards to the Obama Administrations economic stimulus and overall economic plans. For those who are unfamiliar with behavioral economics, it is simply this:

Behavioral economics and behavioral finance are closely related fields that have evolved to be a separate branch of economic and financial analysis which applies scientific research on human and social, cognitive and emotional factors to better understand economic decisions by consumers, borrowers, investors, and how they affect market prices, returns and the allocation of resources.

The field is primarily concerned with the bounds of rationality (selfishness, self-control) of economic agents. Behavioral models typically integrate insights from psychology with neo-classical economic theory. Behavioral Finance has become the theoretical basis for technical analysis. Behavioral analysts are mostly concerned with the effects of market decisions, but also those of public choice, another source of economic decisions with some similar biases towards promoting self-interest.

Why is this interesting in today’s economy and the current planning of the Obama Administration? Well, from my perspective I believe in behavioral economics as a solid method or predictive economic analysis. Unlike typical clinical analysis based on static data, the behavioral economic model takes in the human factor. After all, we are all humans and have a brain and emotions. As far as I can tell. So this model makes sense for the real world versus just a statistical approach. However, like all good things, it only takes a few bad apples to spoil the lot. Enter the Obama Administration.

It has been recently reported and discussed by the Administration that it’s crack financial team has been exploring ways in which to apply BE methodology. Ok, so far so good. But the intent of the Administration is to use this methodology to profile the populace based on the data and direct who, what, when, where and how the populace will be served through government services and socialist policies. Essentially, use this data to rule. Now, using all sorts or predictive modeling, analytics, etc are all tools in which policy makers use to make decisions. The difference is that prior, the decision making was on probability, statistics, analysis of static data. Now the move to BE is smart, combined with the static economic models, this should theoretical provide a better insight into the populace. But when BE is used to justify the end results for profiling the popular, it becomes a very slippery slope. And, like all things can be used to justify just about anything. Including validating your actions and point of view.

Finally, using BE in the manner that the Administration is exploring is not being used for true economic behavioral modeling in conjunction with other models to create a solid data set, it is being used to justify wealth redistribution, spending policy, taxation, benefiting one group over another, and more. This from the mouth of the Administration itself.

Its interesting how when certain elements in the U.S. Government, political parties and even friends and allies lambasted the U.S. for “manipulating” or “misleading” the “people” on intelligence data leading up to Operation Enduring Freedom (Invasion of Iraq), but when data, intelligence, methodologies i.e. BE, and statistics are being specifically manipulated to present a specific picture in order to enact and execute the greatest spending spree in the entire history of the United States without any quantifiable data to support the beneficial effects it was intended to provide. Worse, the data that is being put out, is being proven to be false and way short of the mark.

What do you think?

-DF

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Written by David Frederick

June 10, 2009 at 5:32 PM

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