Article: A Psychologically-Inspired Economic Recovery

    Like others who don't really understand our financial meltdown, I have no idea why the stocks that comprise my savings are worth about 40% less than they were a year ago. I can understand panic sell-offs, but the overall picture I get is one vastly distorted by a fun house mirror. As a former psychology teacher, what is happening makes sense to me psychologically but not economically.

   In a New York Times op-ed written earlier this year, Nicholas Epley, a professor of behavioral science at the University of Chicago Graduate School of Business, opined that political leaders are doing a poor job marketing the government's stimulus package- the federal tax refund plan intended to avert a recession. Based on research Professor Epley conducted with colleagues from Harvard, Epley concluded that denominating the money taxpayers will receive "rebates"- instead of "tax bonuses"- decreases the chances that Americans will spend the money, which is the opposite of the intent of the refund.

   In a controlled study Epley and his co-researchers directed, the scientists gave participants $50, which the subjects were informed was part of a research budget. Some of the subjects were told the money was a "rebate"- while others were led to believe that the money was a bonus. A week later, the "bonus"- group reported on average spending over twice as much of the money as did the "rebate"- group.

   Like it or not, psychological science informs us that a rose by another name does not smell quite so sweet. Psychologists studying diverse phenomenon have long known that the way in which issues are framed influences people's behavior. Memory researcher Elizabeth Loftus conducted experiments in the 1970's in which people viewed simulated traffic accidents and were then asked to estimate the speed of the vehicles involved in the crash. Participants that were asked how fast the cars were going when they "smashed" into one another estimated speeds 10 MPH faster than people that were asked how fast the cars were going when they "hit" one another.

   Nobel prize-winner Daniel Kahneman and his colleague Amos Tversky concluded in their work on decision-making that individuals often make irrational or contradictory choices depending upon how issues are presented to them. For example, Kahneman and Tversky asked people whether they would attend an expensive concert under two different conditions. The subjects were first asked to consider that they had arrived at the concert and discovered they had lost their tickets but had sufficient money and could buy comparable seats for the same price. Most respondents said they were unlikely to buy new tickets.

   However, if people were asked whether they would purchase tickets to a concert when they arrived and discovered they had lost the price of the ticket, they generally said they would buy tickets. Logically, there is no difference in the two situations, but Kahneman and Tversky concluded that it's as if we have a mental account into which we place and separate the two situations. What we really have done is to frame the two situations differently.

   Madison Avenue has for many years employed psychologists to increase revenues by effectively framing issues to the public. One of psychology's most famous pioneers was the behaviorist John Watson. Watson brought many of his understandings about human behavior to the field of marketing. He became the highest paid advertising executive in New York City during the 1940's. Among other innovations, Watson is credited with making the coffee break a regular part of our daily routines.

   Regrettably, our policy makers and their advisers are often unaware of scientific studies of human behavior that could better inform their policy choices and ultimately result in more effective communications with the electorate. All Wall Street and our politicians might need these days is a good old fashioned shot of a caffeinated psychologically-inspired coffee break to get things humming again.