Motivation for the Conference
Economic policymakers attempt to improve the welfare of their citizens based on assumptions about how people think, feel, and behave, and on what they view as welfare-improving. Economists usually describe economic agents as fully informed and model them as striving to maximize a set of stable preferences. While these assumptions provide a simple framework for analyzing economic activity, actual human behavior has proved more complex. As a result, economists have started looking to psychologists and others who study human behavior for guidance on the decision-making process, the roles of motivation and emotion, and the determinants and measurement of happiness.

The 48th economic conference sponsored by the Federal Reserve Bank of Boston brought together economists, behavioral scientists, and economic policymakers with the hope of applying insights from psychology and other behavioral disciplines to improve understanding of how people make decisions as individuals and, ultimately, in a macroeconomic setting. The goal of the conference was to help economists and policymakers discover new ways of improving their models, their forecasts, and their economic policy decisions.

Key Themes

• Because human brains have evolved to solve complex social problems, people's behavior tends to change as their circumstances change, undermining consistency across time and context; however, this lack of consistency is not a fault — rather, it is a defining capacity that enables us to engage in complex social situations.
• Although individuals perceive themselves to be unitary creatures, that impression is largely illusory; the brain consists of multiple subsystems, and, although the various subsystems do communicate, the dominant role shifts across subsystems according to context.
• Unconscious behaviors are the ones that are relatively predictable; it is consciousness that introduces the element of unpredictability in human behavior.
• Given the structure of the human brain, it is unlikely that humans will behave as if they are consistently maximizing any single utility function.
• Neural evidence distinguishes four different kinds of utility — anticipated, remembered, choice, and experienced.
• The role of fairness and trust in informal contractual relations is especially crucial for understanding the limits to markets and the roles of relational contracts.

Implications
Many presenters seemed to agree that utility and welfare should be based on a mix of experienced and remembered utility or on the preferences of the controlled deliberative system.

In simple cases, the concept of “libertarian paternalism” may be an acceptable way to help people make decisions they consider to be in their own best interest but often would not make on their own—for example, by setting defaults for retirement savings plans that are in an individual's best interest, while allowing the individual to override the default if he or she so chooses.

Money wage stickiness reflects intrinsic aspects of the human psyche and is, therefore, a normal characteristic of labor markets. Thus, behavioral economics may provide a micro-foundation for Keynesian economics and counter-cyclical fiscal policy and may explain the wage rigidities that underlie the Phillips Curve.

The conference revealed a need to remodel economic man to reflect what we know about the complexity of human behavior. It suggested that additional work in this area would likely yield significant benefits.