Yale SOM Alumni: Behavioral Economics Can Change the World

Behavioral economics can help solve pressing social problems, according to Yale SOM alumni Josh Wright '98 and Katy Davis '12, who spoke at the school on January 28.

Wright is the acting executive director of ideas42, a New York City-based behavioral ideas lab and consulting firm that taps the science of behavioral economics to address some of the world's toughest social problems; Davis is a senior associate at the company.

"We want to have a hand in changing the world," Wright said. The firm works globally in the areas of consumer finance, poverty alleviation, health, education, and the environment. Clients come from the corporate, nonprofit, and governmental sectors.

Yale SOM's Economic Development Club hosted the talk, which was titled "Using Behavioral Economics to Change the World." Wright and Davis outlined basic behavioral economics principles and described how these principles can be applied in issues dealing with financial decision-making.

For example, Wright said, research shows that the cognitive load of financial stress often prevents low-income individuals from setting financial goals that are in their own best interests. "Scarcity creates goal inhibition," he said, explaining that in such a circumstance, tunneling, or focusing on immediate needs, reduces our ability to plan for and think about long-term objectives. Designing financial products that automate financial decisions—such as a workplace financial product that puts people's discretionary spending dollars into a separate account so they don't overspend—is one way to offset this effect.

Davis outlined the firm's process for tackling client problems, which includes defining the scope of the problem, diagnosing the behavioral psychologies at play more specifically, designing an intervention, and then field-testing the intervention. "It's an iterative process where you continuously look for clues," she said.

Economic Development Club co-leader Dipika Ailani '13 said that SOM students are attracted to ideas42's mission-based approach. "Using behavioral economics principles to solve social problems is a novel, cross-disciplinary approach that students are really interested in," she said. "Ideas42 is putting this theory into practice."