Pen and Paper Revolutionaries: Giving Adam Smith a Dose of Reality

It is not often that the staid curriculum of Social Analysis 10 (Ec 10) permits change. Last year, when Barker Professor of Economics Stephen A. Marglin ’59 petitioned for an alternative course, his own department initially denied him. But the Economics department did allow for one change in Ec 10’s lecture line-up last year, and the added material was arguably as subversive as Marglin’s new core.

The new material, called behavioral economics, blends recent psychological and economic research into a pointed critique of the fundamental assumptions of economics. The pioneers in the discipline have notoriously assumed that the people they studied are rational: they plan ahead, look to the future, and manage their money according to their best interest.

But Professor of Economics David I. Laibson ’88, who gave the added Ec 10 lecture this year, has built a career out of proving all the old assumptions wrong. “The big picture is trying to make economics more realistic by incorporating more psychological realism,” Laibson says.

Addressing the rationality assumption through psychology was a further step away from the past. “This is all very new stuff,” says Daniel Benjamin, a graduate student who has been working with Laibson since his freshmen year as an undergraduate. “Economists have suspected that psychology may be important for a lot of economics, but it’s only recently that this kind of work has become the frontier of economic research.”

Much of Laibson’s work deals with impulsivity and self-control problems. “There’s often a gap between what people say they want their lives to be, and what they actually do,” he says. This schism between our present wants and our long-term goals fails to make sense within the traditional economic framework. It is only when psychological principles are incorporated that these differences can be reconciled.

Psychologists have discovered that people often value immediate gratification over future rewards. This breakthrough has enabled Laibson to explain people’s tendencies to waver when faced with what should be an impulsive decision.

This new work has improved economic prediction. With Laibson’s models, they can now predict patterns of credit card borrowing, saving in 401k plans and even addictions. “You know that you have been incredibly influential when your work is used and people stop mentioning your name because its part of the common language of the discipline,” says Benjamin.

As his colleagues put his models to work, Laibson pushes forward, working both with fellow economists and psychologists to fine-tune modeling of human behavior. “David is an incredibly curious person,” Benjamin explains. “He wants to be contributing the big ideas and creating new fields of economics.”