|Sanjit Dhami is Professor of Economics at Leicester University, UK. He is also a fellow at LMU, Munich and The Kiel Institute for the World Economy. He is the author of “The Foundations of Behavioral Economic Analysis”.
1. What motivated you to work on Behavioural Science?
I work in behavioural economics, which is the interface of economics, and the behavioural/social sciences such as psychology, sociology, evolutionary biology, and neuroscience. I am basically an economic theorist but have increasingly engaged in writing papers that contain both, rigorous theory and stringent empirical tests of the predictions of the model.
My formal University training in economics, first at the Punjab School Economics, and then at the Delhi School of Economics, and the University of Toronto was in neoclassical economics (NE). In its “actual practice” (as distinct from the vision of the founding fathers of NE), NE makes implausible assumptions on human cognition and behaviour that eschews the serious use of psychology, sociology, evolutionary biology, and neuroscience. Many of its central assumptions fail the empirical test. This is not surprising as NE takes too narrow a worldview to enable it to successfully explain the relevant evidence.
Almost all the mainstream theoretical models in NE under risk, uncertainty, ambiguity, decision making over time, and in strategic contexts are rejected by the empirical evidence. Readers will do well to remember that the only yardstick on which we judge theories in science is the empirical evidence, not the elegance or the beauty of the theoretical models (which sadly is the default criterion in NE for many). The rationality requirements under NE are too stringent to be met in practice and its default method based on mathematical optimisation and the assumption that humans act “as if” they are fully proficient in modern mathematics and statistics is not tenable. In actual practice, humans tend to use simple rules of thumb or heuristics and they often make mistakes, including sometimes systematic mistakes relative to the optimisation benchmark based on classical statistics and mathematics.
Fortunately, we now have a rigorous theoretical alternative, behavioural economics, that makes predictions that are in much better conformity with the evidence. Behavioral economics (and I include experimental economics under its rubric) respects the scientific method and it subjects theories to stringent empirical testing in the lab and in the field. This is what attracted me to behavioural economics in the first place in 2003 when I heard a talk on prospect theory (a decision theory under risk and uncertainty) and the claim that it makes better predictions than expected utility theory, which was the default under NE. I put prospect theory to the test on 4 puzzles in public finance, that were outstanding for 30 years, and it readily solved those puzzles. This led to my first publication in the area (joint with the Prof. Ali al-Nowaihi) and my desire to explore this area further. Within 3 years I had made the decision that it was untenable to do research using all the assumptions of NE, and there was no looking back after this.
2. What do you think is the future of Behavioural Science in the next five, and ten years? What major challenges do you foresee?
On the positive side, there have now been several Nobel prizes in behavioural economics, much greater acceptance of articles in the top journals, and an increasing number of course at the undergraduate and graduate levels. So the future seems bright. If economists are interested in making meaningful predictions across the entire range of human behaviour, then there is no getting away from internalising behavioural economics (and generally the behavioural sciences).
However, despite impressive advances and path-breaking work, the sum total of knowledge we have at this point is surely just the beginning of the journey. There is much to learn and know. In my forthcoming book with Cass Sunstein (Bounded Rationality: Heuristics and Public Policy, MIT Press, 2022) we set out the research agenda for the future. We need steep progress in many areas of the subject. For instance, we know very little at the moment about how people make decisions under “true uncertainty” (when we have unknown unknowns in the future) although we know a great deal more about how people make decisions under risk and uncertainty. Behavioral economics assumes mathematical optimisation and Bayesian updating as the default positions, but surely most human behaviour is best described as following simple heuristics and rules of thumb. We need to improve our understanding of which heuristics are used when and why. Models of strategic reasoning in economics, based on a Nash equilibrium and its refinements, are far too clever in describing human behaviour which relies on cognitively simpler shortcuts. We need to understand this better, aided by the emerging empirical evidence on strategic behaviour. Norms and culture are likely to play an increasingly bigger role in the behavioural sciences in the future. I am already exploring some of these ideas with Prof. Pavan Mamidi using Indian data at the Centre for Social and Behavioral Change at Ashoka University.
3. Which behavioural scientist(s) do you admire the most and why?
I might be slightly biased because of the ones I am going to name there are many friends.
Danny Kahneman, Amos Tversky, Richard Thaler, Herbert Simon, George Akerlof, Robert Shiller (all Nobel Prize winners except Amos who sadly died before he would have received one). Among the non-Nobel Prize winners (who might yet get it), the ones I admire most are Herbert Gintis, Samuel Bowles, Ernst Fehr, Colin Camerer, Vince Crawford, Matthew Rabin, George Loewenstein, and Roland Benabou.
I admire them for some of the following things other than the fact that many of them have been so helpful and patient with me in commenting on my work and helping to improve it over the years. (1) Their courage to challenge the status-quo NE model. (2) Their respect for the evidence and their willingness to reject long-held theories if the evidence rejects them. (3) Their creativity in proposing new theories when the existing theories are shown to fail. (4) Holding their own theories to high standards of empirical evidence.
4. What advice would you give to a beginner in Behavioural Science? What are some of the crucial skills one has to develop to succeed in this field?
Behavioral sciences are for you if you are broadly interested in human behaviour in any form whether it be individual behaviour, or group behaviour. You should be prepared to master rigorous economic theory that requires training in mathematics & statistics and also be prepared to train in the related interdisciplinary fields in the social and behavioural sciences (certainly the basics of psychology, sociology, and evolutionary biology).
If you are someone starting out in economics, you would do well to question and challenge the NE model more. Herbert Simon, the Nobel prize winner in economics, and inventor of artificial intelligence, said in his Nobel lecture: “But there is no evidence that firms produce at the point where marginal revenue equals marginal costs.” Imagine the importance of this statement. It is like a Nobel prize winning physicist saying that: “But there is no evidence that atoms exist.” How often do you question these assumptions and how often do you let your lecturer teach you this without demanding the empirical evidence? This is true for everything that is taught to you under the rubric of NE. Don’t let your instructors get away without a good account of whether the evidence supports or not the theories that they teach you. This is an important element in bringing out change in the education of economists—and it is beginning to happen in some of the more enlightened University departments.
If you are thinking of going to University to do a degree in economics, do be worried if a prospective University does not have a single course in behavioural economics. The absence of such a course already tells you a lot about the place and its ethos.
If you wish to be a successful researcher in the field, you must satisfy two further conditions. (1) You should have unending deep curiosity and passion to understand the world around you. (2) You should also have the courage to shed theories when they are rejected by the empirical evidence (after all this is science, not religion!!!). For this you need good training in the methodology and the philosophy of science. This is lacking in a typical economics degree. In its place we have some of the current leaders in NE, providing their own homegrown views about what constitutes good science and advocating practices that are ultimately retrogressive for the subject (see the introductory chapter of my 2016 book for a discussion of these issues). We need to do better. Research also requires you to be creative. Whilst some creativity might be a matter of how well trained you are in your field, enabling you to make surprising links between seemingly unrelated areas, creativity is also likely to have an innate component that is difficult to teach.
5. If you were starting your career again today, what would you do differently?
I would probably take a more interdisciplinary approach to learning. I would also be bolder in challenging the existing theories based on the empirical evidence. However, there is only so much you can do as an undergraduate student. In economics, courses in theoretical economics (say, in micro, game theory) are taught almost in isolation from the evidence. This is very different from courses in, say, theoretical physics which consider a tight interface between theory and the evidence. The current practice of evidence-free courses in microeconomic theory and game theory in economics is damaging and something I absolutely abhor. As an undergraduate student, one has little input into designing the relevant courses. So I would vote with my feet and pick a University based on the strength that it has in this area.
6. What books/publications would you like to recommend to our readers?
Excuse me for some self-indulgent and gratuitous remarks on my books first.
I took 12 years to write a book on a new interdisciplinary vision of economics (The foundations of Behavioral Economic Analysis, Oxford University Press). It was originally published in one volume in 2016. Since then it has been updated, improved, and now published in 7 volumes in 2019 and 2020. It is endorsed by the who’s who in behavioural economics, including 3 Nobel Prize winners. A second book with Cass Sunstein to be published next year by MIT Press on bounded rationality will, I believe, be enjoyed by those who are generally interested in the beahvioural sciences. Details on my website: https://www2.le.ac.uk/departments/business/people/academic/sdhami.
Here are some interdisciplinary books that I believe might be useful for you and the ones that I personally enjoyed reading very much:
Samuel Bowles (2004) “Microeconomics: Behavior, Institutions, and Evolution” Princeton University Press.
Samuel Bowles and Herbert Gintis (2011) “A cooperative species: Human reciprocity and evolution.” Princeton University Press.
Daniel Kahneman (2011) “Thinking Slow and Fast” Farrar, Straus and Giroux
Daniel Kahneman and Amos Tversky (2000) “Choices values and frames.” Cambridge University Press.
Joseph Henrich (2016) “The secret of our success.” Princeton University Press.
Herbert Gintis (2017) “Individuality and Entanglement.” Princeton University Press.
Melanie Mitchell (2009) “Complexity: A guided tour.” Oxford University Press.
Richard Thaler (2015) “Misbehaving: The making of behavioral economics.” Norton.
7. What is your favourite quote in Behavioural Science?
I don’t have a single favourite quote but here are two that readily come to my mind:
Richard Thaler (1999) describing Behavioral Finance: “Behavioral finance is no longer as controversial a subject as it once was. As financial economists become accustomed to thinking about the role of human behaviour in driving stock prices, people will look back at the articles published in the past 15 years and wonder what the fuss was about. I predict that in the not-too-distant future, the term ‘behavioural finance’ will be correctly viewed as a redundant phrase. What other kind of finance is there? In their enlightenment, economists will routinely incorporate as much ‘behaviour’ into their models as they observe in the real world. After all, to do otherwise would be irrational.”
Tversky and Kahneman (1974, p. 1125) in describing the representativeness heuristic and the tendency of people of alternate too much between heads and tails when asked to construct a random sequence of coin tosses: “Chance is commonly viewed as a self-correcting process in which a deviation in one direction induces a deviation in the opposite direction to restore the equilibrium. In fact, deviations are not “corrected” as a chance process unfolds, they are merely diluted.”
8. How do you apply the notions of Behavioural Science in your personal life?
I often find the following concepts from behavioural science useful to understand the behaviour of others and even my own behaviour: Reference dependence, loss aversion, non-linear probability weighting, other-regarding preferences, reciprocity, present-biased preferences, heuristics and rules of thumb, social norms, and culture.