Behavioural economics is fun. It starts off with anecdotes, experiments, and simple generalizations about people's behaviour. People are averse to losses, they go with the default option, and are overconfident. Behavioural economists give fun quizzes.
Intermediate microeconomics, on the other hand, is hard. It begins with abstract concepts such as indifference curves and production functions. These are conceptually difficult ideas, and their relevance to the real world is not obvious.
Incorporating behavioural economics into the intermediate micro curriculum is, therefore, highly dangerous. Anyone exposed to behavioural economics may be tempted to reject mainstream economics entirely, and go off and major in psychology.
Yet behavioural economics and more traditional approaches are complementary. If behavioural economics tells us that people aren't perfectly rational, intermediate micro tells us that they aren't stupid either. A number of Richard Thaler and Cass Sunstein's "nudges" illustrate this point. For example, here they describe an organization called stickK.com, which operates as follows:
StickK offers two ways to make commitments: ﬁnancial and nonﬁnancial. With financial commitments, an individual puts up money and agrees to accomplish a goal by a certain date. He also specifies how to verify that he has met his goal. For example, he might agree to a weigh-in at a doctor’s office or a friend’s house; a urine test for nicotine at a clinic; or an honor-system verification. If the person reaches his goal, he gets his money back. If he fails, the money goes to charity.
StickK.com essentially allows people to increase the price they face for bad behaviour. Impacts of a price change? That sounds like a case for intermediate micro.
Here is the question I've set my students based on the Stickk.com nudge.
Ruth has two personalities. Impulsive Ruth loves to eat potato chips. Planner Ruth knows that she shouldn’t eat potato chips, because they make her gain weight and break out. Planner Ruth (who is able to get things done) makes the following commitment: she writes Stickk.com a series of cheques for $50 each. Every time she eats a bag of potato chips, an alarm sounds in Stickk headquarters, one of her $50 cheques is cashed, and the money goes to the Toronto Maple Leaf Supporters Club.
- How does Planner Ruth’s commitment change the price Impulsive Ruth faces for potato chips?
- Show the impact of Planner Ruth’s commitment on Impulsive Ruth’s budget constraint
- Impulsive Ruth is impulsive, but she’s not totally irrational. How might she be expected to respond to the change in the price of potato chips?
The stickK.com website has lots of testimonials from satisfied customers that could be used as the basis for similar questions - people who have used stickK to increase the price that they face for overeating, not studying and so on. The idea comes from behavioural economics - but intermediate micro explains why it works.