n the histories of economics still to be written, the
spring of 1994 will almost certainly be flagged as momentous.
That is when an ophthalmologist's son from Main Line
Philadelphia — David Laibson — received his Ph.D. in economics,
qualifying with a thesis about willpower and money that drew as
much on psychology and quirky behavior as on standard economics.
Harvard quickly hired him, becoming the first university to
deliberately recruit an economics professor trained as a
behavioral economist.
Behavioral economics had finally arrived: a discipline that
for a half-century had built its theories on the rigid
assumption that people acted with rational, unemotional
self-interest had formally recognized that human beings had
another, feisty, side to them.
Three years later, the Massachusetts Institute of Technology
followed Harvard's lead, hiring Sendhil Mullainathan just after
he earned his Ph.D. He, too, was steeped in both psychology and
economics, as well as memories of an impoverished early
childhood in rural India.
Mr. Laibson, now 34, and Mr. Mullainathan, 27, are rising
stars in a generation of economists that are gradually
integrating behavioral economics into mainstream theory. Many
are still graduate students. They are bunched at prestigious
training centers — Harvard, M.I.T., Stanford, the University of
Chicago, Princeton, Yale, the University of California at
Berkeley. And their appearance on the scene is timely.
Behavioral economists help to explain how booms persist while
busts, like the one that the United States may now be entering,
are difficult to reverse. Their research sheds light on why
identity — the traits people assign to themselves and to others
— plays a huge and often damaging role in the economy. If the
behaviorists are correct, shares of companies on the New York
Stock Exchange are overvalued and the Dow Jones industrial
average has further to fall. And if the behaviorists prevail,
the mainstream view of a rational, self-regulating economy may
well be amended and policies adopted to control irrational,
sometimes destructive behavior. Twenty-five years of
deregulation might lose its appeal.
"We are engaged in a conversation in economics where people
who are intrigued by the importance of psychological phenomenon
are making their case to the profession at large," Mr. Laibson
said. "I am optimistic that we will be successful, but I cannot
presume to know the outcome. The mainstream is saying the
behavior we describe may be real, but is minor."
The behaviorists' numbers are still small — fewer than 20
percent of the graduate students in economics. But that is up
from almost none when Mr. Laibson entered M.I.T.'s graduate
program in 1990 and Mr. Mullainathan began his graduate studies
at Harvard in 1993.
"If you were to graph the number of behavioral economists on
the job market, it was zero, and then there was Laibson and me,"
Mr. Mullainathan said. "The market saw that we did well, and now
there is a ton of graduate students on the market. Well, maybe
not a ton. But it looked to me like I was taking a big risk, and
afterward, it turned out that I was at the front end of a
fad."
Their reputations have been on the rise ever since. Mr.
Laibson built his mostly on the strength of an "anomaly" that he
had described about people and money. When people expect money
but have not yet received it, they are capable of planning,
quite rationally, how much of it to spend immediately and how
much to save. That squares with mainstream theory, which argues
that for a modest incentive, people are willing to save and put
off spending. But when the money actually arrives, willpower
breaks down and — barring locked-in paycheck deductions — the
money is often spent right away. The phenomenon is called
"hyperbolic discounting," an economist's way of saying that a
bird in hand is worth not two in the bush, but more like six or
seven.
