Microfinance institutions probably go back to the emergence of monetised societies themselves. In the Western hemisphere, we know of a long tradition of mutual insurance, burial clubs and credit unions. More recently, microfinance initiatives in developing economies have caught the imagination of the international public, and we have seen a resurgence of interest in credit unions. During the past decade, new forms of financial intermediation have sprung up online, lead by ZOPA in the area of unsecured personal loans and more recently complemented by startups catering for business credit (e.g. Funding Circle). It is gradually becoming clear that online credit exchanges are but part of a wider process of re-intermediation in the financial services sector. This process is increasingly addressed under the broad label of ‘crowdfunding’. While originally associated with crowd funded media projects in the widest sense (Kickstarter), crowdfunding as a term is increasingly used in a much more traditional sense. Two alternative forms of online funding models are gaining foothold under the same label of crowdfunding, but behaviorally with quite different implications, not the least from a regulatory point of view.
On the one hand, there is an originally charitable tradition in crowdfunding, whereby donors commit funds to projects that they feel are worthy of support in their own right. These funds might be pure gifts, or they may take the form of non-commercial and non-collateralised loans that are more or less written off in case of default, or they may amount to de facto lines of credit offered to a prospective seller, again with little practical scope for come back in case of default. On the other hand, there is a tradition best summarised as neoliberal in orientation. Here, crowdfunding rests on an underlying commitment not to charitable giving or reciprocity, but to hard-nosed market exchange. It is in the context of this tradition that the recent turn to equity crowd funding needs to be understood. In equity crowd funding the crowd no longer lends but assumes asset ownership, ironically in quite the same way as it already does on the stock market via online trading platforms, but extended to essentially unregulated small to medium-sized startups.
It is debatable whether a new term for the latter is really warranted. Kevin Lawton and Dan Marom’s Crowdfunding Revolution brings this to the point when suggesting that the rise of crowdfunding is, in principle, a return of natural market forces to less competitive and transparent areas of financial intermediation.
Behavioral framing is be important here. Social crowdfunding, in the charitable and reciprocal tradition, taps into quite different motivations to lend compared to equity investing. While ‘caveat emptor’ should rightly be written on the mast of equity crowdfunding, social crowdfunding tends to prosper where funders feel sufficiently confident to suspend their caveats.
Economics has rightly taken pride in the level of technical sophistication it has been able to bring to bear on social scientific research over the past one hundred years. Robert Shiller, in a recent interview with Nigel Warburton over at Social Science Space, is not the first to underline that this specialisation has come at the cost of disciplinary myopia. But he brings those drawbacks incisively to the point: where financial economists could have relied on their judgment and perception of ongoing developments relating to the wider implications of securitization and ever more sophisticated levels of financial engineering, they revelled in the arcana of options pricing models and arbitrage theory. Where circumstancial evidence might have pointed them to all the hall marks of a market bubble, they remained immersed in more ‘scientific’ form of empirical research that has the unfortunate drawback of being retrospective.
Retrospective empirical research, so Shiller, has led to a curious kind of scientific progress in economics. An economic intuition, drawn from past phenomena, furnishes the material for a novel economic concept, model or theory. Names are made, prizes one. Alas, the original phenomenon then curiously disappears, maybe even because it has been cast into a model that has diffused into the world of practitioners and informed their practice. We are reminded of Maynard Keynes’s ‘beauty contest’ metaphor of financial markets, where the winning strategy involves guessing what the perception of other market participants is. Sociological insights such as Merton’s work on self-fulfilling prophecies are foundational to the modern understanding of banks and financial bubbles. Here, even behavioral economics has still some way to go. Often described as a psychological turn in late 20th century economics, it’s true promsie lies in a more broadly oriented interdisciplinary widening of social scientific horizons. Neuroscientific insights into decision making are just one such opportunity for gains from transdisciplinary trade.
Politicians have taken to insights from behavioral economics pretty quick. This has been a direct result of one of the key implications of the economic approach to understanding human behaviour, even in its canonical form. According to the standard rational choice approach, there are two key determinants of individual choice. On the one hand, there is a set of options, and on the other there is a preference weighting over those options. The options form a constrained subset of feasible options among a wider more encompassing set of all conceivable options. The constraints arise out of budget, cognitive or otherwise informational, and feasibility restrictions. Even in the standard approach thus, it is clear that choice can be influenced both on the side of preferences, and on the side of constraints. What the behavioural perspective is adding to this is a pychological, sociological and institutional grounding of both the preference and the constraint side. Choice architectures are basically those features of a decision situation that are structural in the sense that they shape either preferences or constraints (or both) in a way that is receptive to marginal intervention. Hence the possibility of prescriptive accounts of the purposeful redesign of choice architectures, with their partly controversial political implications.
Bobby Duffy, Head of Social Research at Ipsos MORI UK, has now presented evidence in a recent piece in the New Statesman according to which the relative acceptance of benevolent paternalism as a policy tool various considerably between different countries. And there is an inherent tension between our general acceptance of the difference between ‘good’ and ‘bad’ choices, and our reluctance, broadly speaking, to allow government to engineer choice architectures such that those ‘good’ choices prevail.
Marketing theorists readily recognise economics and in particular microeconomics as one of the key disciplines forming the foundations of marketing theory and applications. It should thus not come as a big surprise to hear that this carries over to the new economic behaviorism. In many ways, behavioral economics is conceptually closer to marketing than many strands in conventional microeconomics. Still, it is useful to have this spelled out and developed at some level of detail by the , with a particular emphasis of making insights from behavioral economics useful to advertising campaigns. For earlier initiatives along related lines, see for example Goldstein et al (2008) in the Harvard Business Review Magazine. An interesting recent paper by Young and Caisey (2010) seeks to deepen those links further by setting out a behavioral economics informed social marketing programme to reduce car ownership and use as a means of combatting anthropogenic climatechange as well as obesity.
Imagine that marriage becomes privatised. Privatising marriage would mean that the state monopoly on government licensing of marriages would come to an end. Marriage-granting organisations would be free to set their own rules of marriage and license couples accordingly, while the word ‘marriage’ would disappear from legal code. In its place, one would have contractual domestic partnership agreements between any two individuals, similar in kind to a business partnership. Such agreements would regulate the distribution of resources upon cancellation of the agreement for example, as well as organising care for any dependants.
Richard Thaler and Cass Sunstein, the authors of Nudge (Caravan, 2008), are convinced that the partnership agreements just described would allow society to take a step back and consider the social benefits of stable cohabitation on their own merit, freed from any ideological or religious connotations that come with the concept of marriage. Their underlying proposals may sound radical, but they are based on the fundamental insight that the most important aspects of decision making have to do with the prevailing ‘choice architecture’ within which decisions are made, and those choice architectures have decisive influence on how we behave. In fact, it may be much more effective to redesign a particular choice architecture so that individuals receive a gentle ‘nudge’ in the desired direction, than to try to change individual behaviour directly by fiat.
But even this nudging towards preferable behaviour already runs counter some longstanding commitments of liberally minded economists who have traditionally held that ‘de gustibus non est disputandum’: individual tastes should be taken as given. What Thaler and Sunstein’s benevolent paternalism suggests instead is to step beyond suggestions that given tastes are innocent starting points of analysis. If choice architectures are as easily amenable to change as their analysis, and that of numerous other behavioural economists, suggests then a more realistic approach would have to formulate economic choice in terms of its underlying choice architecture, which may be open to attempts to redesign it.
See also Thaler & Sunstein’s blog: Nudge
(A version of this review has been published in: “Book of the Month: Nudge.” The Grapevine, December 2009, p. 12)