Make it simple!

DEMAND AND SUPPLY By Boo Chanco

“My mantra is, if you want to get people to do something, make it easy,” Richard Thaler said Monday in an interview posted by the University of Chicago after he was named this year’s Nobel Prize winner in economics.

Just for that, my simple mind tells me he deserves the award… so counterintuitive to many economists and bureaucrats who love to complicate things.

Thaler pointed to financial aid forms. They are notoriously hard to fill out and dissuade some students from going to college. Thaler said the federal government could change that easily by using technology to auto-fill many of the fields on the application form.

Ah, Thaler has not seen the tax forms we have to grapple with every month, every quarter, every year. He would have been horrified. Hopefully, Finance Secretary Sonny Dominguez fulfills his promise to simplify those forms to make it easier for us to comply.

Thaler, a professor at the University of Chicago, has won the 2017 Nobel Prize in economics for his work on behavioral economics. In layman’s terms, that is the branch of economics that tries to understand how humans make decisions, yes trying to understand the bad ones that leave people who think they are rational dumbfounded.

As The Atlantic puts it, “Thaler’s career has been a lifelong war on Homo economicus, that mythical species of purely rational hominids who dwell exclusively in the models of classical economic theory…”

Thaler’s work shows that assuming human beings are predictably irrational is the most rational approach to studying their behavior.

Thaler, the Washington Post pointed out, is one of the leading experts in the relatively new field that combines psychology and economics. He has made a career of studying why we make poor choices. In giving him the award, the Nobel committee said Thaler has incorporated psychologically realistic assumptions into analyses of economic decision-making.

Speaking from his home in Chicago to a news conference at the Royal Academy, Thaler said he felt the most important impact of his work was “the recognition that economic agents are human.”

Here is how Per Strömberg, chairman of the prize committee puts it:

“Human behavior is very complex. So, if we want to construct useful models of economic behavior, we have to make simplifications. One such simplification which has been very important in economics is the assumption that humans behave in a fully rational way and make economic decisions in a way as to maximize their own well-being.”

But Strömberg said, researchers have gathered more evidence from psychology on how humans deviate from rational economic decisions. “Richard Thaler is a pioneer when it comes to incorporating such insights from psychology into economic analysis,” he said.

“Thanks to his contributions and discoveries, this new field (of behavioral economics) has gone from being sort of a fringe and somewhat controversial part of economics to being a mainstream area of contemporary economic research,” the chairman of the prize committee said.

In citing Thaler, the Royal Swedish Academy of Sciences noted that: “By exploring the consequences of limited rationality, social preferences, and lack of self-control, Thaler has shown how these human traits systematically affect individual decisions as well as market outcomes…”

In so many words, “he has made economics more human.”

An article in marginalrevolution.com commenting on Thaler’s selection observed “this is a prize that is easy to understand. It is a prize for behavioral economics, for the ongoing importance of psychology in economic decision-making.”

The article went on to recall that an early Thaler piece is on a phenomenon known as “mental accounting.”

“For instance you might treat a dollar in your pocket as different from a dollar in your bank account. Or earned money may be treated different from money you just chanced upon, or won that morning in the stock market.

“This has significant implications for predicting consumer decisions concerning saving and spending; in particular, economists cannot simply measure income, but must consider where the money came from and how it is perceived by consumers, namely how they are performing their mental accounting of the funds.”

The Nobel committee praised Thaler for trying to “nudge” people and companies to make better decisions. While he has written many scholarly papers and books, Thaler has also written many commentaries, including one where he scolded Congress for extending tax cuts for the wealthy.

NPR.org: “One area singled out by the committee is Thaler’s work on retirement savings. He was an early proponent of employers automatically enrolling their workers in 401(k) programs. He also developed a ‘Save More Tomorrow’ retirement plan that encourages people to put future salary increases toward retirement.

Other Thaler ideas are also relevant to us.

Social preferences: Thaler’s theoretical and experimental research on fairness showed how consumers’ fairness concerns may stop firms from raising prices in periods of high demand, but not in times of rising costs.

Lack of self-control: Thaler has also shed new light on the old observation that New Year’s resolutions can be hard to keep. He showed how to analyze self-control problems using a planner-doer model, which involves the internal tension between long-term planning and short-term doing.

From Forbes.com: Succumbing to short-term temptation is an important reason why our plans to save for old age, or make healthier lifestyle choices, often fail. In his applied work, Thaler demonstrated how nudging – a term he coined – may help people exercise better self-control when saving for a pension, as well in other contexts.

In total, the award-giving body noted that Richard Thaler’s contributions have built a bridge between the economic and psychological analyses of individual decision-making. “His empirical findings and theoretical insights have been instrumental in creating the new and rapidly expanding field of behavioral economics, which has had a profound impact on many areas of economic research and policy.”

For us non-economists, the award is significant because it showed economics is not just about crunching numbers in an antiseptic mathematical model. It debunks old economic assumptions that people will always act in their best interests. Just look at how impoverished whites in the American red states voted for candidates who would take away their medical plans to produce funds that will finance very generous tax cuts for the very rich.

I imagine the Nobel committee had been recognizing work done in behavioral economics precisely because old assumptions don’t work. This relatively new field does not forget that people are human beings, inconvenient as that might be to the quantitatively oriented economists.

This is why I think the administration’s tax reform proposal is deficient. It puts its faith in a mathematical model, but does not recognize as much how people will react to impositions under the new tax law.

Maybe Sen. Sonny Angara did reduce the potential tax take of the reform measure, but his ideas on how to mitigate sharp increases in consumer prices make sense, given volatility in political sentiments. He may save us the trouble of civil unrest from increased prices of fuel, electricity and other goods patronized by the poor.

Senator Angara’s thinking on how to encourage greater tax compliance among the self employed and professionals that do not pay taxes today deserves to be tested on the ground. Minimizing contact between tax payers and tax collectors make a lot of sense but the proposed measure still depends heavily on scrutiny of itemized deductions by usually corrupt BIR examiners.

In the end, it is as I have always said, simplify the process of compliance and make the people feel good to comply. Complicating the tax code makes it easier for the rich to avoid taxes and for the corrupt revenue collectors to go on their usual kalakaran. In the meantime, the hard working middle class, a fast vanishing segment, carries the burden of financing the government.

Remember what this year’s Nobel Prize winner in economics said: Simplify if you want people to comply.

Boo Chanco’s e-mail address is bchanco@gmail.com. Follow him on Twitter @boochanco

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