One question, subject to much debate, is whether behavioural economics comple-ments or contradicts the Standard Economic Model. Some commentators argue that behavioural economics, by questioning the assumptions and axioms of the SEM, is a fun-damental challenge to all that is implied by neoclassical economics. Addressing academic economists and students of economics, Kalle Lasn wrote in 2012:
Outside your department, a vigorous heterodox economics thrives. . . . There are social economists, feminist economists, inter-disciplinary economists, behavioral
economists, ecological economists and hundreds of intellectuals and maverick pro-fessors who are openly critical of the neoclassical regime and fighting to overthrow it.
(n.p.) An opposing view is that behavioural economics, once seen as heretical, has become part of the mainstream. This view gains currency from the flood of publications which are devoted to, or incorporate elements from behavioural economics, which are being produced by regulators, government departments, corporations, marketing and advertis-ing agencies, consultancy firms and think tanks.
Whilst this controversy is unresolved, what is clear is that the assumptions underlying the SEM, predicated on Rational Economic Man, often lead to erroneous conclusions.
Many now hold that the SEM takes insufficient account of actual human psychology, and agree that (economic) behaviour is frequently subject to biased decision making and cognitive and mental flaws. Decisions are often based on the hot and fast shortcuts of System 1 rather than the cool reflection of System 2 favoured by standard economics.
In recognition of this, Richard Thaler commented in 2015, “Behavioural economics is, to a large extent, standard economics that has been modified to incorporate Seemingly Irrelevant Factors.” But incorporating the insights into the Standard Economic Model, or producing a formal Behavioural Economics Model, has yet to happen – matching a model with the simplicity, tractability and applicability of the SEM is difficult if the start-ing point is, as with behavioural economics, based on a series of anomalies.
The most striking current aspect of behavioural economics is how it is now being used to inform public policy and interventions designed to change behaviour, based on ideas like Nudges, choice architecture and defaults. Although such techniques are now being used by the state and non-governmental organizations, similar insights have long been used by the commercial sector whether or not under the heading ‘behavioural econom-ics.’ As Richard Thaler says, it’s important to “Nudge for Good.”
To conclude, what is arguably most remarkable is that economics is probably the only discipline in the social sciences in which the development of ‘behavioural’ economics could be viewed as what Thomas Kuhn described as a ‘paradigm shift’. For practically every-one other than ‘conventional’ economists, whether social scientists, businesses, marketers or members of the public, the insights yielded by behavioural economics and the contrasts with the findings of the SEM would appear to be little more than ‘business as usual’.
Controversy aside, what remains unarguable is that, as Camerer and Loewenstein (2004) say, “Behavioural economics increases the explanatory power of economics by providing it with more realistic psychological foundations.” Or as Charlie Munger, Vice Chairman of Warren Buffet’s company Berkshire Hathaway, put it in 1995: “If econom-ics isn’t behavioural, I don’t know what is”.
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