Interview With Isabelle Brocas, Professor of Economics, USC, And Co-Director, Los Angeles Behavioral Economics Laboratory (LABEL)

Interviewer: Mark Moore, Professor (Teaching) of Economics, USC Fall 2022

MARK: Today we have with us Professor Isabelle Brocas, who’s going to talk with us about behavioral economics. Welcome Isabelle.
ISABELLE: Welcome as well. Thank you, Mark, for having me.

MARK: I would like to start by asking how you would describe or distinguish behavioral economics from the field of economics generally.
ISABELLE: It’s the assumptions about how people make decisions. When we study economics, we meet Homo economicus, that is, a perfectly logical person, with no cognitive limitation, who understands its environment and can make correct inferences about it. It’s a perfect person. It has a very clear objective as well, and this is very useful because this allows us to write its utility function and to do all sorts of economic modeling and make predictions about everything. It allows us to make game theory.

But when we look at people’s behavior we see very often that they are behaving in a very different way. And so, behavioral economics. What it’s trying to do is to see what parts of these assumptions we make about rational decision making are wrong, and to try to build new models in order to explain behavior better.

So we use models that involve the other social sciences, but also neuroscience and biology, to try to understand how people really think, and whether we can use this information in order to make models that are better suited to what we observe.

Obviously sometimes what we observe is not that far from the predictions of rational models, but very often they are very different. And this is when it really matters to have a correct model to make good predictions.

MARK: Could you give us an example where the predictions of classical economics or traditional economics would be very different from those of behavioral economics?
Isabelle: One example might be intertemporal discounting, choices between objects or decisions that involve the present and the future. We have a certain way of thinking about these decisions in a traditional model. But normally we see that people are inconsistent in the kind of choices they make. So, for instance, there is a tendency to procrastinate when I would like to save. So instead of saving, I consume today. The traditional model cannot really accommodate this. People should be able to commit to whatever they do. But people don’t do that.

In general, people procrastinate on everything that is costly in the present, and this is because there is an immediacy effect. It’s a problem for a wide range of economic decisions— saving, health, working on your homework– any kind of decision that has some cost in the present and some benefits in the future. A similar issue arises in the reverse scenario, for decisions that have benefits in the present and costs in the future such as purchasing something that you’re going to have to pay in the future. In that case, you want to purchase it because of the immediate utility from it and you don’t pay much attention to the fact that you may not have the money to pay in the future. Right? This is a kind of behavior that we see all the time in economics.

MARK: Does behavioral economics suggest any interventions to help people not procrastinate?
ISABELLE: Well, we can use nudges in order to induce people to take a correct decision. For instance, we can use a default in order to lock them into some behavior that they cannot easily get away from. This has been done in the context of retirement saving, where there are default pension plans. We can also limit opportunities in some cases. Actually, we see that in countries where there are fewer credit opportunities, people are saving more and purchasing less.

MARK: Could you tell us a little bit about some of your own work?

ISABELLE: My research is very interdisciplinary. One thing I’ve been working on a lot in recent years is trying to understand the decision making of adults by looking at children. The idea is that we see people not acting rationally or strategically in real life. They are having all kinds of biases in judgment. Why is it the case that people behave like this? Maybe there is an innate tendency to have biases, or maybe these biases develop as we grow. Maybe we can design intervention at the level of schools. Maybe we can teach kids differently and make them more literate in economic terms, but also more able to strategize with others and to make better decisions for themselves in life.

I’ve been working with children and looking at very different paradigms that we study normally in economic decision making with adults. I’ve been trying to see how behavior changes as children grow and whether there are points in time where they stop developing. We find very often that development takes place very early. Children develop logic, cognitive abilities, the ability to make trade-offs and to strategize with others. But at some point this stops, often during middle school and high school. Not so much happens after that in terms of many aspects of decision making. Within some particular paradigms we don’t see any kind of development, ever, so adults behave exactly the same as two year-olds, which is kind of interesting sometimes.

MARK: Could you say a little bit about your lab and some work that’s going on there?

Isabelle: The work at my lab is interdisciplinary. We focus on fundamental research that tries to understand the underlying mechanism of decision-making. We try to understand why people do what they do.

Sometimes what they do is strange from the perspective of an outside observer, but we can rationalize it within the rational economic model. Other times, their behavior is biased. We then try to understand how people come up with their decisions, what is the underlying process.

We can look at these processes in various ways. One way is to introduce what is called non-choice data. Non-choice data concern processes that are taking place when you’re making a choice. So, for instance, you might take more time or less time to make a decision, or you might be aroused. We can measure the time you take or your skin conductance response and use it to explain and predict the kind of choice you make. Another example is eye-tracking to see whether people are paying more attention to some features of a choice. Another way of studying underlying processes is by looking at the neuro-correlates of decisions, what brain region or network is activated when you make a certain choice. All these non-choice data tell us something about what’s happening at the biological level.

Another approach is to study people with different attributes, for example different ages. When we age, and when we develop, our brain changes, our biology changes, and this is what leads people to process information differently, and to behave differently.

We use both approaches in my lab, to try to pinpoint the underlying mechanisms that explain choices. This helps build new models. For instance, we can sometimes differentiate decisions that are habitual as opposed to ones that people may have more chance or ability to reflect upon.

MARK: Can we use behavioral economics to help people make better choices?

Isabelle: I think people are very internally consistent, which does not mean that they are rational. It means that their behavior follows a logic that is hard to see from an outside perspective. For instance, if a person is afraid of everything then they’re going to see danger all the time, and of course, if they see danger, they have to be afraid. So that’s internal consistency. This behavior can still be irrational if there is no objective reason to be afraid.

One of the big issues in trying to change behavior is such internal consistency. For instance, it’s very difficult to make people believe something they don’t believe, because they are going to use their framework to evaluate any kind of new belief. And because of that, if there is something that’s not exactly in line with what they would like to believe they’re not going to believe it.

Changing behavior also requires people to process things differently, to rewire their brains somehow. It is about developing new habits, which is hard to achieve. This is why it is so important to build good habits in children. For instance, we should teach economics to children! One of the reasons why adults are not able to make good economic decisions is because they have never been taught to do that or developed good decision-making habits.

MARK: How can undergraduates at USC get involved in your research?

ISABELLE: We have an experimental methods class (ECON 620L) that is open to all students, andthatistaughtatdifferentlevels. Studentswhohavetakenthismethodsclasscan participate in many aspects of our studies. Interested students should contact me before the beginning of the fall semester.

MARK: Thank you so much, Isabelle. This has been a lot of fun.

ISABELLE: It has been a lot of fun, too, for me. Thank you.