A Fictional historic view of the future

October 10, 2009 BY danariely

A Fictional historic view of the future: a look at policy from 2034 back to the last 25 years

This is what I think I would like t0 write in 25 years…

It is hard to remember how politicians used to go about legislating policies. Let’s take a quick trip down memory lane and examine public policy, as it was twenty-five years ago, before the experimental policy era—that is, an approach that values and nurtures social experimentation as a way to design policies – we live in now.

As you may recall, in 2008-2009 a global financial crisis was brought on by lack of transparency, conflicts of interest, terrible bank-lending policies, complex financial instruments, and lack of government regulations. Above all, a religious-like belief that humans and the market are perfectly rational was a major contributor to this historical catastrophe and the five-year economic recession that followed.

In retrospect it sounds ridiculous, but before the 2008 crisis, rational economics– now largely restricted to university courses taught by a few academics–was the only guiding light that politicians used while designing taxation strategies, policies, and institutions.  When the economic tragedy of 2008 hit, it illustrated beyond any doubt that relying on the assumption of perfect rationality is dangerous; and this realization, in turn, ushered in a new era for behavioral economics.

After the initial shock from the crisis, this painful and expensive lesson caused businesses and policy makers to recognize three main lessons: 1) human beings have many irrational tendencies, fallibilities, and quirks; 2) we often have bad intuitions and a limited understanding of our irrational tendencies and; 3) if we want to create effective policies we shouldn’t rely on our intuitions for finding recommendations nor on the assumption that people behave rationally; instead, we should ground our recommendations in how people actually behave.

With these three lessons in mind, the business and policy landscape changed dramatically over the next twenty-five years. As expected, businesses led the charge and questioned their basic assumptions about the relationship between salary and productivity, the value of meetings, and the problems with conflicts of interest. After a few years spent watching in awe as business productivity improved,  government policymakers followed suit by implementing experiments with the Education-Forward Initiative (formerly No Child Left Behind). These experiments showed that basing teachers’ salaries on student performances had minor short-term benefits and caused substantial long-term damage on teacher and student motivation; that creating interest in education was more important than grades; and that shifting the curriculum focus from calculus to statistics and probability had a wonderful impact on students.

Between 2019 and 2025, experimental policy, which became a more established field, examined the simplification of the income tax (with huge social and tax benefits) and studied incentives that encouraged people to get routine medical exams (with tremendous long-term benefits). Currently up for debate are the benefits and disadvantages of socialized health care. In 2009, this might have become an ideological debate about right and wrong. But given our realization of how little we truly understand ourselves and the systems we design, combined with an appreciation for the benefits of detailed experimental investigations and empiricism, we are trying to solve this important issue by setting up multiple different experimental programs.  In some of these the levels of co-pay are low, in some medium and in some high.  In some of these programs the focus is in specialists, while in others the focus on the family doctor, and some focus on treating patients while other focus on preventative care and education. Rhode Island, being a small state, currently runs many of these experiments and in the next few years we will have a much better idea of the costs and benefits, both short-term and long-term, associated with all of these approaches.  Based on these we will pick the best policy to adapt. At the end, thanks to experimental policy, the decision will be based on solid empirical testing and data, not on a misconception of rationality.

In light of these improvements, maybe the financial meltdown of 2008-2009 was really a blessing in disguise; It got us to think more carefully across the assumptions we were making across the board and helped us get rid of the assumption of perfect rationality and replace it with empirical data.