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Public Affairs Forum


Why We Do What We Do: Economics of Human Motivation

March 12, 2014

An interview with Glenn Harrison, director, Center for the Economic Analysis of Risk, Georgia State University

Paula Tkac: I'm Paula Tkac, and today I am joined by Professor Glenn Harrison from Georgia State University for our latest Public Affairs Forum. Welcome, Glenn.

Glenn Harrison: Thank you.

Tkac: So in your role as director of the Center for the Economic Analysis of Risk and in your research career, you've done a lot of thinking about how people will think about risk, how you might measure risk, how you might manage risk. So tell me a little bit about what risk means to you. What kinds of problems have a risk component to them?

Harrison: Sure. Just about everything. And one of the things that we are interested in is, "How does your perception of the risk differ from that of experts, how does it differ from what the data is telling us, and are you right?" So to me risk is everywhere, and that means that risk touches every area of analysis and policy that we are interested in.

Tkac: So it's not just financial. It could be things like the risk of getting cancer or the risk of losing your job. There could be many other aspects to risk, and (I think my understanding is correct) you are not just looking at the risk of individuals, although in some of the work we're talking about today you are, but also how organizations manage risk, how households as a group manage risk.

Harrison: Right. So there are two issues there that you touched on that are critical for CEAR (the Center for the Economic Analysis of Risk). One is that we are interested in risk across different domains. It's financial risk or health risk—mortality, morbidity, employment risk. All of these tend to flow into some financial consequences. So traditionally what we've done in economics, at least in risk management, is we have said these boil down into a change in your wealth or your income, so let's just analyze financial risk. But what we've realized is that a lot of people don't think that way. And in fact, one of the most exciting things that we've done is find people that are experts at managing risk in the financial domain and just idiots when it comes to their knowledge and their perception and the way they update their beliefs in the health domain. One of the challenges for us in terms of policy, for example, is, "How can we help people take the skills that they have in some domains into other domains where they might not even perceive the risk there?" That's part of the problem.

The second thing you raised is really central to CEAR and that is (it sounds technical), "What is the level of agency of risk?" "Who is the decision maker?" So a household might aggregate risk very differently than the individuals within a household. If you're looking at corporations, how the corporate governance questions that arise in terms of risk management, and the Fed, of course, is looking at, "How does a country manage its risk and manage its exposure?"

Tkac: So tonight you're going to talk a little bit about the role of behavioral economics in studying public policy, and so I'm going to ask you for another, sort of, definitional example. In your own words, kind of, how do you think about behavioral economics? It can mean a lot of things to a lot of people (and it's gotten a lot of press) and so tell me where you come down on both what is it, and what can we use it for, and, maybe, what it's not so good to be used for?

Harrison: So behavioral economics is about, first of all, taking insights from laboratory environments, looking at them in the field, and also asking, "To what extent do we see them in our everyday lives?"

Let me give you one example, one really great example that fascinates economists and should continue to fascinate economists—it's just gambling. When people go to casinos and you know that the house is going to take (it's posted on the wall, they actually are required in many states to post on the wall what the house take is) and people willingly go there. But why do people knowingly give money to somebody else? Behaviorists have made tremendous strides in understanding the types of framing of games, of even lotteries. Here in Georgia the way they frame the lottery—they show the skewness of the prizes—can frame people to purchase more lotteries or not purchase lotteries. That's valuable information.

Unfortunately, there is also just a lot of hype there, and that's our job as scholars to sort out the wheat from the chaff.

Tkac: Keep it rigorous, right? High standards, but bring the models to a new level.

Harrison: Yeah, and draw out the policy conclusions rigorously. So we're all interested in individual behavior and one of the things that a lot people aren't aware about is, "How much of the Fed's policymaking, any policymaker, is concerned about behavior?" How do people react to news about inflation, how do they react to the Greek crisis, how do they react to 2008, how does it affect their behavior? I know that analysts at the Fed and in other places spend a lot of time worrying about how people's behavior will react to certain news, so getting predictions of behavior more accurate…

Tkac: To Fed communications, for one example.

Harrison: Absolutely. The next question then is, "How do I improve your decision making?" So if you have got a surgeon who is giving you several options for surgery, and that surgeon is trying to communicate to you the risks, the upside risks and the downside risks, how does he do that? Does he use numbers, does he use words, does he use charts, does he use metaphors? We're all a little bit different.

One of the things that we've discovered is that there is no magic bullet. There is no one best way to communicate risks of, say, surgical procedures—you might be a numbers person; somebody else might be a charts persons; somebody might need little cartoon figures. And the interesting question is, "How can we identify how best to communicate risk to you so you make the best decisions for yourself?"

Tkac: Great, thank you very much, Glenn. It's been a pleasure. I look forward to your talk tonight.

Harrison: Great, thank you. I enjoyed it myself.