When Econ Met Psych

This semester, Jeremiah L. Lowin ’07 found his plans for a joint concentration frustrated when he was unable to enroll in Economics 1030, “Psychology and Economics,” a foundational course for study in an emerging field that has attracted the attention of students and top professors across the nation.

As Lowin vied with over 150 other students for a spot in the 90-person class, Harvard, too, aims to secure a spot at the forefront of research that combines economics and psychology, also known as “behavioral economics.”

This year, the economics department is moving to expand its faculty in this field, luring Professor of Economics Sendhil Mullainathan from MIT to Harvard, and extending a tenure offer to Matthew Rabin of the University of California at Berkeley, both of whom are doing extensive work in behavioral economics.

“Our department probably makes an average of one or two tenure offers a year...so to make two offers to Professor Mullainathan and Matthew Rabin is certainly a strong signal that our department is certainly very interested in this field,” says Chair of the Economics Department Alberto Alesina, who says psychology and economics has emerged as a “booming field” in the last five or six years.

Behavioral economics seeks to explore the psychological factors, other than the traditional model of rational self-interest, that influence economic behavior.

Undergraduates, too, are eager to tap into the new field, despite the difficulties involved in pursuing joint degrees.

“Economics is basically the study of rational decision-making, but I definitely don’t think people are like machines and operate rationally,” Lowin says. “There’s more to it than graphs and diagrams and I want to study why people value the things they do and make the choices they do.”

The field of psychology and economics “allows people to make mistakes and be irrational, and basically allows people to be people,” he says.

“It certainly seems to me there’s greater interest,” says Robert H. Neugeboren, an Assistant Director of Undergraduate Studies in Economics.

With more professors in the field, “undergrads will have more opportunities to do more coursework and research,” Neugeboren adds.

RATIONAL GROWTH

“The professors who I would consider in this field of behavioral economics are so decentralized. There are classes I would take at the Medical School that are relevant to my field,” says Lisa Xu ’06, a joint concentrator in Psychology and Economics.

Joint concentrators in Psychology and Economics tend to take the foundational courses in both departments, as well as those offered by Harvard’s other schools.

“The way the departments are structured now, it kind of forces you to go to different departments. You have to do a lot more research, to try to pull those resources together at the University,” says Xu.

To develop and centralize its resources in the field of behavioral economics, the Economics Department, largely considered to be one of the best faculties in the country, is expanding its faculty in this field as its first step.

“[Psychology and economics] is a very, very new thing, and our department is at the forefront,” says Alesina.

Mullainathan, a MacArthur “genius” grant recipient who taught at MIT for five years and offers his first courses at Harvard this semester, teaches Economics 1035, “Policy Applications of Psychology and Economics,” which enrolled over 70 undergraduates, as well as several graduate seminars.

An economics professor at Berkeley and another MacArthur grant recipient, Rabin, who was a visiting professor at Harvard last year, has just received an offer of tenure from the Economics Department.

Rabin, who also received the John Bates Clark Medal, specializes in microeconomics, game theory, and psychology and economics. He could not be reached for comment.

Mullainathan has joined a contingent of three Economics Department professors, David I. Laibson ’88, Jeremy C. Stein, and Nicola Fuchs-Schuendeln, whose research interests involve psychology and economics, a field in economics that is still relatively new.

The psychological dimension of economics is “an area that wasn’t really on the map at all twenty years ago,” and it “has become a very active and very dynamic part of the intellectual landscape,” says Laibson, who teaches Economics 1030, as well as Economics 2030, “Psychology and Economics,” with Mullainathan.

“I think the subject is really thriving. It’s almost trendy,” says Xu.

The new field factors in “a psychologically interesting individual who is largely self-interested and largely rational, but who at the same time cares a great deal about their social interactions, and about others, and who sometimes makes errors in their decisions, and who sometimes suffers from self-control problems,” Laibson says.

SOCIAL IMPLICATIONS

Mullainathan, who was born in India and lived there until he was seven years old, has focused much of his research on using behavioral economics to improve the quality of life in developing countries and poor communities in the United States.

He spent two and a half weeks in India in January, researching the use of Internet kiosks as bank accounts in rural areas.

In his work, Mullainathan has collaborated frequently with NGO’s and small, local companies, rather than under the auspices of governments.

“Sometimes there’s a lot more freedom working with NGO’s and companies than working with the government, especially in developing countries,” he says.

He has also conducted research with the Center for Economic Progress, based in Chicago, to help the very poor set up bank accounts, so as to “get poor people to better manage their money” through psychological and economic incentives.

“Sendhil [Mullainathan] has a brilliant ability to identify genius tests of important social phenomenon,” says Laibson, who described Mullainathan’s most current research in the psychological effect of marketing as “remarkable.”

“He’s very innovative; he’s on the cutting edge of both economics and psychology,” Laibson adds.

Mullainathan says he finds the prospect that small changes in public policy can have a large impact on human behavior particularly inspirational.

“With small amounts of activity, small changes to economic behavior, we can get big impacts on health, life and death, and poverty,” he says. “Normally, we have fairly expensive solutions to problems like that.”

Psychology and economics, combined in one field, offers a greater range of instruments with which to implement social policies. Mullainathan’s work explores how the use of psychological factors that influence people’s decisions can help construct effective social programs.

In fact, Mullainathan says the opportunity to work with Harvard’s psychology department was one of the reasons he left MIT. “The psychology department made the decision much easier,” he says.

FINDING THE COURSES

Currently, students who want to concentrate in both psychology and economics have to split their coursework between the two subjects.

Xu says that her joint concentration in Psychology and Economics “forces me to take classes in departments I wouldn’t have looked at before, so I got a lot more exposure.”

“It makes you work harder,” Xu adds. “But you might actually expose yourself to more.”

The Economics Department looks forward to adding more behavioral economics courses to its current offerings, a move that will make the joint concentration easier for many students.

“In the future, yes, we’ll offer more courses in psychology and economics,” says Alesina. “Certainly there’s been an increase in the number of graduate students interested in this area, and I suspect this is the same for undergraduate economics concentrators.”

Alesina suggested that in the future, courses may be jointly offered by the Psychology and Economics Departments.

“I think if there were more classes in the field, more students would concentrate in it because it would require less effort. They wouldn’t have to go to a social psychology class and a microeconomics class,” says Lowin.

The interdisciplinary and innovative nature of the field makes Mullainathan’s behavioral economics courses appealing to students.

“It’s the newest research, and we don’t have solutions to all of the problems he poses. That’s one of the reasons he runs it like a discussion,” says Baillie F. Aaron ’07, a student taking Economics 1035 with Mullainathan.

Students say Mullainathan’s teaching style complements the new research covered in his course.

“He likes to get the class involved,” says James Z. Morocco ’06, who is also taking Economics 1035.

Mullainathan incorporates discussions of crime, discrimination and other social phenomena into his course.

“I’m trying to take social problems that are important,” Mullainathan says. “And I’m trying to say, ‘lets look at this one problem from an economic perspective and look at this problem from a psychological perspective, and look at how they complement or how they conflict with each other.’”

—Staff writer Tina Wang can be reached at tinawang@fas.harvard.edu.