The economics of immediate gratification
Matthew Rabin, BP Amoco lecture
London School of Economics, 27 February 2001

Matthew Rabin is professor of Economics at the University of California. He is an economic theorist and a leading researcher in the new field of 'behavioural economics'.

In the nineties there was growing scepticism about economics and economists both amongst the general public and within the profession itself. The charge made notably by writers such as Paul Ormerod in his book The Death of Economics, was that economic theory and analysis was failing to reflect the real world and that economic predictions were becoming increasingly innaccurate and unreliable.

These issues were not new. In the early eighties the 'rational expectations' school attempted to improve the accuracy of economic modelling by incorporating the notion that rational economic agents would use their experience to form expectations of how the economy worked. They would then use these expectations in subsequent economic activities and this process would result in economic agents acting rationally in accordance with how the economy really behaves.

Notwithstanding the political dimension (the rational expectations model was closely identified with the rightwing monetarist school), critics such as Ormerod have argued that this made matters worse. Not only was economics failing, but it was doing so in increasingly abstract, convoluted and esoteric ways. Fundamentally for the critics, the Rational Economic Man of conventional economic theory was self-evidently flawed and needed to be overhauled.

Professor Matthew Rubin's work in the field of behavioural economics is an attempt to 'integrate greater psychological realism into mainstream economics'. Rubin's work is highly theoretical but he does see the potential for applications to such realms as 'consumer purchases, savings, addictions and procrastinations'.

Professor Rubin's people do not act rationally, but they are irrational in predictable and consistent ways. He is ambitiously attempting to incorporate the reality of human behaviour into an economic model. For example, most people given the choice of one apple today or two apples tomorrow would, contrary to orthodox economic thinking, opt for one apple today. Orthodox economic modelling does not take into account the time dimension, and this is Rubin's area of specialisation. Put simply, we value instant gratification over long term gratification even when it is clearly in our own interest not to do so.

The critics of economics are right in many respects and any attempt to address the impenetrable realm of academic economics should be given a catious welcome. Nonetheless, I do have reservations. Hypothetical models have always been important to economics. They are useful when considering trends or generalities, as long as economists remember that they are just models and make clear the assumptions behind them.

As economics begins to resemble a branch of behavioural psychology, it is important to remember that behavioural psychology itself has had a painful history. Amongst other unresolved controversies are issues surrounding the nature of human conciousness and individual motivation, so there is no ready-made basis for the new economics.

With regard to the practical implications of these ideas, maybe I'm being cynical when I imagine that this approach will simply result in more efficient and inventive ways to govern us and sell us things.