International bestsellers in one of the most interesting areas of economic thought, behavioral economics (and more) were chosen by NES Professor Evgeny Yakovlev for his bookshelf. Is it possible to find the roots of crises in human nature and our irrationality? How to encourage people to make the right choice, giving them the freedom of choice? How can we learn to make the right decisions? These are the research areas of the most stellar economists of our time, including some Nobel Prize winners. They write about them in simple and fascinating language. The selection also includes books about ways to fight poverty and find cause and effect relationships – the key task of any research.
Your friend works in catering for schools, and she is trying to solve an important task: to make sure that children eat during their lunch healthy and not junk food, for example vegetables and not French fries. Does this require changing the menu, or would changing the layout of dishes in the dining room be enough? The famous book by the winner of the Nobel Prize in Economics Richard Thaler, co-authored with lawyer Cass Sunstein, begins with a description of this case. The book is about nudging and the theory of nudging.
Smart and gentle nudging leaves a person free to choose, but without cognitive distortions and emotions interfering with making the right choice. Thaler tells us how to encourage a person to save enough for retirement, how to fight obesity in schoolchildren, how to reduce the number of cigarette butts thrown on the street, and how to use white stripes on the road to encourage the driver to slow down before a sharp turn. Nudges are all around us, even though we do not always notice them.
Doubt that you are always right – this is the main recommendation of the famous book by Daniel Kahneman, one of the founders of behavioral economics. In 2002, he received the Nobel Prize in Economics, which, as he writes, he should have shared with Amos Tversky, who had not lived up to that moment and with whom they had been carrying out joint research for many years.
Kahneman described in a very simple and popular way how the human brain functions. At the beginning of the book, he suggests doing two things: looking at a photo and solving a multiplication problem. These are two types of thinking – fast and slow; and the starting point of his narrative is the story about two systems of thinking – analytical and intuitive. Kahneman describes our thinking in the following way: we make a lot of mistakes, we are lazy to think and collect the necessary information, we do not always control our actions and rely on our intuition (quick thinking), we often make hasty and wrong decisions. We are irrational. In a word, we are humans…
Kahneman shows why we are wrong, illustrating his ideas with remarkable examples. And most importantly, he gives recommendations that help to avoid mistakes or at least, not to make them too often. After all, psychologists (and Kahneman is a psychologist, not an economist) are also people, which means they may also be wrong.
This is one of the most famous and interesting books about human irrationality, the epidemic of irrational exuberance, and the global financial crisis of 2008-2009, written by two Nobel Prize winners. It is so fascinating (no wonder since the authors are famous for their research on the role of narratives) that it reads like light fiction.
Akerlof and Shiller ask an important question: why no one noticed anything wrong before all the troubles – bank crashes, layoffs, foreclosures on mortgages – hit us all. In search for an answer, they turn to the ideas of the great John Maynard Keynes about human irrationality and the impact of this irrationality on markets and the economy.
Keynes recognized that in the area of economic activity a person is mostly rational, that is, not always. This irrational feature is the main reason for economic fluctuations. Therefore, to understand economics, one has to figure out how it is driven by irrationality, Akerlof and Shiller write.
The book is full of examples of irrational behavior of people and markets. In the preface to the Russian edition, Shiller writes about his visit to the New Economic School and gives an example of irrational exuberance, recalling a conversation with the driver who told him about an apartment near the Kremlin being sold for $150,000 per 1 sq. m.
The book examines five manifestations of irrationality and their impact on the economy: trust, justice, abuse and dishonesty, monetary illusion and how our ideas about reality are intertwined with stories from our lives.
The scholars show how these five manifestations of irrationality impact the start of economic depressions, people being unable to find jobs and being careless about savings, etc. They question many ideas of economic mainstream of their time, for example, that people in all their economic decisions make adjustments for inflation. However, the crisis itself refuted most of those axioms.
The authors of the book are convinced that in quiet times, the state need not actively interfere in a free market economy, even though it is far from perfect. But everything changes when a crisis sets in: then the state must stabilize the economy and help it return to equilibrium. In this difficult period, we have to pay special attention to economic justice. And if we manage to avoid serious recessions and blatant injustice, the market economy, that helped billions of people achieve prosperity, will continue to develop for the benefit of even more people, Shiller states in the preface. And here we can recall Russian economist Egor Gaidar who once said that the pace of its unstoppable growth is one of the disasters of capitalism: it can be stable only when it develops rapidly, when new human needs emerge and get satisfied.
Winners of the 2019 Nobel Prize in Economics Esther Duflo and Abhijit Banerjee bust the popular myths about ways to overcome poverty and offer their own view on this issue. The key idea is stated in the preface: it is necessary that "we abandon the habit of reducing the poor to cartoon characters and take the time to really understand their lives, in all their complexity and richness." Instead of large-scale paternalistic projects that do not take into account the real situation of the poor, the authors propose the doctrine of acting small.
Duflo and Banerjee rely on the most up-to-date academic research on the behavior of the poor. They show that, despite a meager ration, the poor spend money to buy a TV, a parabolic antenna and a DVD player. The scholars explain how to effectively fight malaria, how microfinance helps to break out of the poverty trap, how to properly push people to get vaccinated, and why the effect of the introduction of widespread school education turned out to be much less than expected. The book gives an excellent picture of what modern economists who study developing countries are actually doing.
The research of David Card, who received the Nobel Prize in Economics in 2021, and his co-author Alan Krueger, who did not live to see that moment, dismantle the standard ideas of theoretical thinkers about the impact of minimum wage on unemployment. Theoretically an increase in minimum wage leads to less hiring by firms. The data collected by Card and Kruger do not confirm this view. They analyzed the New Jersey labor market in 1992 before and after the minimum wage increase, comparing the situation with neighboring Pennsylvania, where wages remained unchanged. And they also analyzed market reaction to the increase in minimum wage in California in 1998. In both cases, employment went up.
The studies of Card and Kruger have made a great contribution to the development of economics. The main task of any research is to identify cause-and-effect relationships without confusing them with mere correlation. And the methods of Card and Kruger, that they borrowed from natural sciences such as medicine and biology, help to distinguish between “after” and “as a consequence.” An example of such a natural experiment in economics was the study of the reaction of the labor market to an increase in the minimum wage in neighboring states.