Putting Obama on the Couch

"So, like, do you think Obama is just mean or something?" That is how a twentysomething television booker recently responded to my critique to her of the president's stimulus package and banking bailout plans. Actually, I think Team Obama is filled with dedicated, hard-working folks trying to do the best job they can. But how to explain a series of puzzling economic decisions such as basing a budget on a hyperbullish economic forecast or dragging their feet on fixing the teetering financial system?

Well, I think I've figured it out: The White House, fatigued if not overwhelmed by the horrific economic crisis, may be suffering from a number of "cognitive biases" as identified by the burgeoning field of behavioral economics. This approach looks at the various flawed ways humans make choices in the real world vs. the "econ" world where supposedly we're all cool, calculating "rational agents." (Such analysis helps explain irrationalities like asset bubbles and the success of the film Paul Blart, Mall Cop.)

The irony here is that one reason econ wonks -- and columnist David Brooks -- have been so infatuated with the president's policy team is that it seemed fully aware of this intellectual revolution. Key advisers, such as Austan Goolsbee and Cass Sunstein, are from the University of Chicago, a hotbed of behavioral research, as is the president himself. How ironic, then, that Team Obama may have fallen victim to several psych-economic pitfalls. Decide for yourself:

1) Anchoring Bias -- relying too heavily on past choices or events when making a decision. Stock analysts do this, for instance, when they stick too closely to their initial earnings forecasts or price targets. In Team Obama's case, they've pretty much hewed to their original campaign agenda -- healthcare reform, green technology, cap-and-trade -- even though the cracking global economy should have created a sense of urgency around fixing the banking system and creating real stimulus focused on keeping and creating jobs in 2009 and 2010. But as White House Chief of Staff Rahm Emanuel put it, "Never allow a crisis to go to waste."

2) Attentional Bias -- ignoring relevant data when making decisions or judgments. The administration has chosen not to lower taxes on capital or corporate profits, despite recent examples (in 1997and 2003) that show the economic oomph reductions can generate. Indeed, cutting taxes, not merely proposing refundable tax credits, was never really on the policy table. Instead, Obama kept up the campaign fiction that the Bush tax cuts actually contributed to the current recession, noting how the economy failed to boom immediately after the 2001 cuts. (Also see Blind Spot Bias.)

3) Overconfidence Effect -- putting excessive confidence in one's own answers. The White House economic plan is full of specifics, such as the exact impact of various spending multipliers or the exact number of jobs that will be saved or created by its policies. So confident was the Obama econ team, in fact, that it apparently really didn't matter to them what the specifics of the $800 billion stimulus plan were. Thus the White House could outsource the details to House Democrats such as Speaker Nancy Pelosi. The result was a final plan perhaps smaller than what Obama really wanted. Plus, it barely passed.

4) Planning Fallacy -- underestimating completion times. Think Boston's Big Dig or Chicago's Millennium Park. Back on Feb. 9, Obama told the world in a news conference that "tomorrow my Treasury Secretary, Tim Geithner, will be announcing some very clear and specific plans for how we are going to start loosening up credit once again." Instead of "clear and specific plans," investors got a sketchy conceptual rescue with a key element -- what to do about toxic assets -- obviously a work in progress. Markets are still waiting, and bank stocks keep dropping.

5) Wishful Thinking -- making decisions based on what you would like to happen. The Obama budget is based on an extremely optimistic forecast, that the economy will turn on a dime after the first quarter and grow at 3.5 percent or greater for the rest of the president's term. If Obama's right, then perhaps the economy can power through the heavy tax increases and Fed tightening that lie ahead and create vast tax revenues to pay for his green investments and healthcare reform. If not, we face wallet-draining deficits and a lengthy period of economic stagnation. (Also see Ostrich Effect.)

One way researchers suggest dealing with such mental quirks is through something called "choice architecture." In short, design systems that factor in human failings and gently direct people toward better decisions. In the book Nudge by Sunstein and Richard Thaler, the authors suggest, for instance, making workers actively opt out of 401(k) plans instead of making non-participation the default choice. (This deals with our tendency toward inertia, the same phenomenon that nudges us to keep the TV on the same channel when a show ends.

Of course, our nation's dominant choice architecture is called the Constitution and it's pretty tough to tweak. (A two-third vote to raise taxes would be nice, though.) And in any event, the president's popularity ratings are still pretty high. Then again, maybe those folks have fallen victim to Post-Purchase Rationalization Bias, the tendency of people to persuade themselves that a previous decision was a good one.