In the 1960s, Irving Kristol acidly remarked that “it takes a Ph.D. in economics to be able to avoid understanding the obvious.” Now comes Matthew Rabin, and a bunch of other Ph.D.s in economics, using advanced mathematical computer models to prove–get hold of yourself–that the obvious is in fact true. Rabin demonstrated, indeed, that the answer to each of the rhetorical questions asked in the first paragraph of this article is “yes.” For such work in the burgeoning new discipline called “behavioral economics,” the 37-year-old professor at the University of California, Berkeley, recently won the coveted John Bates Clark Award, given every two years by the American Economics Association to an economist under 40 who has produced the most important research. A year before, Rabin pulled down a $500,000 grant, known as “a genius award,” from the MacArthur Foundation in Chicago.
This is not–quite–as silly as one might think. Market economics (the capitalist, individualist kind that won the cold war) assumes that people are fundamentally rational in their economic behavior and therefore make the best use of their own skills and the best use possible of their own purchasing power. This is why market economists prefer leaving each person free to make her or his own choices. By “maximizing their own utility,” they will simultaneously maximize results for society as a whole.
One problem with this theory is that it works too well, leaving new young economic theorists nothing much to discover. Another problem is that the definition of the word “rational” or “utility” can vary and, in the real world, be immensely complex. Obviously, each person on earth, occasionally or often, does stupid, emotional, shortsighted things. How rational or useful is it for people to overload themselves on 18 percent-a-year credit-card debt to buy designer clothes they rarely wear? Or for poor teenagers to buy $200 sneakers? Rabin and his fellow behavioral economists have sometimes seized on these commonplace anomalies to challenge the very idea that “rational choice” exists–and other times, more interestingly, to explore the obvious and damaging aberrations that so bedevil mankind.
One of their central assertions is that, contrary to standard economic theory, human beings value gratification today vastly more than they do gratification tomorrow or the day after tomorrow or the day after that, in steeply diminishing returns. Rabin says his research thus shows that procrastination leads many people irrationally to defer and then default on putting money into such things as tax-deferred savings accounts even though deadlines loom. Similarly, the desire for gratification right now, which Rabin’s work precisely measures, explains why people get blitzed on drugs today even though they know it’ll destroy their futures. Under “time inconsistent preference,” as Rabin calls his theory, future considerations plummet. By contrast, standard economics says preferences take a stately stroll downslope every day, step by equal step. Rabin hopes that his theories can lead to better policy–such as the creation of multiple and escalating deadlines for putting money into tax-exempt savings programs instead of the single drop-dead deadlines of today.
Rabin dresses the maverick, wearing a tie-dyed knit shirt as his invariable business attire, below a trim beard. He boasts of going to the University of Chicago, the lion’s den of “rational expectations,” and emerging with his contrarian convictions intact. If he is right and the behavioral economists manage to change prevailing theory, their system of rationally measuring–and then controlling–“irrational” human behavior could become a powerful economic tool. On the other hand, Rabin himself at this stage concedes he is just exploring the obvious. “One of [my] most complicated papers,” Rabin told NEWSWEEK, “takes 30 pages of algebra to show that deadlines are a good idea.”
Skepticism aside, it’s plain that “rationalizing” the irrational like this can have its uses. If nothing else, it brings scientists themselves back to common sense. James Buchanan, of George Mason University in Virginia, won a Nobel Prize a decade ago for proving that government bureaucrats, or even employees in big private companies anywhere, tend to care more about their own comforts, benefits and salaries than they care about the taxpayers or customers they are supposed to serve. Now, is that rational or irrational, Mr. Rabin?
