Economics isn’t just a number’s game. Human irrationality is so intrinsically tied up in the human need to rationalize that financial decisions are often made when our conscious brains are held for ransom by our emotions. Because of this, the study of money has specific branches devoted to the study of Homo sapiens interacting with money. The dismal science has genetic, experimental, and neurological branches. Then there is cognitive economics, the economics of what is going on in people’s minds.
Cognitive economics is characterized by its unique use of data. Rather than skimming from markets or hooking up sensors to subjects, cognitive economists rely on surveys, interviews, and attitudes. Still, the internal dynamics of cognitive economics still hinges more on the numbers-side of economics, rather than psychology. This area of study can help researchers understand what people are looking for, whether it’s a successful retirement or just general happiness, and how policy can shape or reshape that search.
Inverse spoke with Miles Kimball, professor of economics and survey research at the University of Michigan, about his chosen field. A research affiliate at the Populations Studies Center and research associate at the National Bureau of Economic Research, Kimball sometimes moonlights as a columnist for Quartz. He spends a lot of time thinking about the role of cognition in our internal and financial systems.
This interview has been edited and condensed, but not too much because Kimball is super interesting.
Why is this field of study called cognitive economics and how is it an analogy to cognitive psychology?
The definition that I came up with is that cognitive economics is what is in people’s minds. This is basically a branch of behavioral economics. Behavioral economics is a very broad area of studying all the things that shouldn’t happen according to traditional economic theory. Economists are trained to identify when someone is doing something strange — their behavior seems confused, they don’t quite understand the situation. The goal of the economist is to talk about people’s motivations, what they’re trying to accomplish; their preferences.
Historically, the first thing that a behavioral economist did was try to document the things people do when their actions look strange from the standpoint of standard economic theory. My way, as a cognitive economist, is to look at the reasons why they have these preferences. The first category of explanation is that standard economics is fine, but there may be something deeper going on that you just didn’t see, even though what you’re doing makes perfect sense according to standard economic theory. Like any scientific discipline, one of the jobs of economics is to understand how the world works. Trying to understand why people do what they do, how society fits together, and how that fits into a policy point of view — economics has taken on the job of helping people get more of what they want. And we can use data to actually get a good idea of what that is. For example, a goal would be to use this data to influence public policy so that people understand when to claim their social security benefits.
So, is the job of cognitive economics, in part, to figure out what people want and then try to help them achieve that?
That’s certainly an element. If people don’t know something — what economists call imperfect information — we now have models that are very good with dealing with that imperfect information processing. There are certainly many choices in life that are really tough, especially in the financial market, that you may not figure out correctly. Deception doesn’t necessarily rely on lying — you can reveal everything in the fine print and still deceive people. How many of us have clicked yes on user agreements without understanding the real cost of what’s happening? Certain institutions of the government, like the Consumer Financial Protection Bureau, incorporates cognitive economics to deliver good results to people who may not have a handle on the complications of financial products.
It’s interesting because the image that people have of companies is that they have tricky products, and from there are able to make big profits off of people. It’s actually trickier than that. It is possible to make profits by tricking people, which will cause more firms to make profits in the industry. At the end of the day what happens is that people who are smarter than average get these products cheaper, and the people who are easily tricked are paying through the nose. You see this with credit card grace periods. People who are really smart about how they use their credit card actually get the zero interest loans. But this is at the expense of the people who go in thinking they’re going to be sensible using their credit card, but then don’t realize how many things are going to come up, that are going to make that hard to do. That’s a simple example, but there are plenty more you can go through! Companies may come off like they’re just trying to make a profit by tricking people, but interestingly enough it ends up being less smart people subsidizing smart people.
In what ways is cognitive economics different than other fields of economic research?
Different branches of economics have different characteristic data types. There is a field called neuroeconomics where you do brain scans on people. You have them make economic decisions, and you utilize scull caps that will record brain activity with EEGs. Somewhat more modestly, cognitive economics is a survey. It can be combined with lab data and neuroeconomics, but its bread and butter is survey data. You ask people what they’re thinking, what they’re feeling, and you have access to their minds by asking.
So surveys are the key?
Well, cognitive economics is all about humans! It’s a branch of behavioral economics, and economics itself is really on the border with psychology. In fact, some people wanted to call this “psychology and economics” but I think cognitive economics is more descriptive. I don’t want to downplay the influence of psychology in economics, I’m just saying that if somehow economists have never read psychology literature, behavioral economics would have still emerged.
How do you conduct your research?
By designing surveys and analyzing the answers with a team. Dan Benjamin and I started this initiative and we just finished designing a survey about how people rate presidential candidates and use a scale in a sophisticated way. The idea is to compare whether you would rather have, say, Bernie Sanders become president for sure or wake up on election day with an election between Hillary Clinton and Donald Trump, in which either has a real chance to win.
We work very hard to make the question understandable — it’s a balancing act. On the one hand we have an economic concept we want to get. This is called an expected utility rating. We’re trying to get a rating of exactly, in between your best and worst candidate, where the other candidates are. This is economic theory in a powerful way and we can’t compromise on that. You could maybe think of a question that is worded in an easier way, but then we wouldn’t have an economic concept at the end. Trying to get survey questions that have a certain precision to them is quite a trick.
If you’re only surveying people about what they did or if you’re using data from firms about what they bought, that’s considered standard economics, not cognitive economics. But if you’re asking them about what they’re thinking about, what they want, then it gets to be cognitive economics. We sometimes end up working on one question for a week.
On your blog you have one section titled “So You Want to Save the World.” What role do you think cognitive economics has in making society a more fruitful place for everyone?
The initiative that I mentioned earlier is the Wellbeing Measurement Initiative. We view the economics of happiness as a part of cognitive economics. When asking about what is in people’s minds, it’s not just the math they’re doing, but their feelings while they do this. There has been quite a big push by many governments to essentially have a national well-being measurement. There’s wide recognition that gross domestic product is inadequate in representing the things that people care about. We have to incorporate things like people’s relationship with their family, their romantic relationships, the want to have meaning in life — we could go on and on. For these projects, we sit down and try to design survey questions for everything we can think of that is somewhat at the abstract level. Right now we have a list of 120 — there are a lot of things that people want!
In regard to what governments have done so far, the United Kingdom, for example, has questions that look at how happy you are, how satisfied you are with your life, how anxious you have been, do you feel your life is worthwhile, etcetera. They’ve collected a lot of data on that, but we don’t think those few questions are enough to cover the waterfront. We’re hoping that 120 will do an okay job at measuring how well somebody is.
People look at how money is spent, because money creates data. But this is only one element — that score card needs to include factors like if the person feels they’re doing better than last year; how they feel affected by different government policies. You also need to do randomized trials and try different options to see what makes people feel better off.
You’ve got to face the facts that most government policies, if you have an A/B test, doing it one way is going to make it better for some people, and worse for other people — especially when you think about something like taxes. There are only a few ways of making everybody better off, and even then you’ll probably have a few individuals who end up worse off. However, things do get better in society when individuals have statistical agency — you start identifying the subtle ways that can make everybody better off.