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Best Business Books 2004: Behavioral Economics

Another example concerns the proliferating choices of investment options in retirement plans. Studies find that, typically, employees simply divide their money equally among their options. If there are four options -- for example, one low-risk and three with higher risk -- people tend to put 25 percent of their funds in each. As the book points out, a manager offering this choice to employees is actually subtly handing over the responsibility for the individual's retirement security. It's fair to ask, however, whether most people have the expertise to make wise choices in this important financial decision (and in fact this is being asked in the U.S. in the policy debate over the future of Social Security).

This analysis seems to lead logically to the conclusion that there are too many brands of cereal on the shelves for our psychological well-being. It taps into an important new literature on economics and happiness arguing that people in rich countries are happier than people in poor countries. But beyond a certain level of development, extra economic growth does not increase people's happiness. Economists are taking seriously this question of how economic growth is related to our well-being. Schwartz's message will also resonate with many people uneasy with modern capitalism, including environmentalists.

There are some real difficulties with his argument, though. The psychological evidence is clear, but its implications are not. Consider other areas of choice: book titles, say, or charities. In both, there has also been an explosion of choice in recent times. But few of us would be so willing to accept the argument that there's too much choice in these cases. Whatever the psychological stresses, we recognize the great merits of alternatives. But who's to say when the benefits of choice outweigh the costs? Economists? Professors of social theory? Government officials? Journalists? Or do we say it ourselves?

Trade-offs are part of the human condition. Every course of action has an opportunity cost (an essential insight of economics). Is it better not to make the trade-offs explicit, for the sake of our peace of mind? Surely not. For this reason, it's hard to recommend a reduction in choice, and so the book ends with several chapters of rather banal advice on how to avoid the stress, such as not overindulging in shopping and reminding yourself to be grateful for everything you have. Halfhearted self-help aside, this is a thought-provoking treatment of some of the most exciting new ideas emerging from the study of economics.

Kindness of Strangers
In The Company of Strangers, Paul Seabright, professor of economics at the University of Toulouse in France, also draws on the accumulated evidence from human psychology, evolution, and anthropology to explore the everyday miracle of coordination in the modern global economy. It is only for the past 10,000 years -- just a blink on the evolutionary timescale -- that humans have had regular nonviolent contact with people other than their genetic relatives. Prior to that, a meeting with a stranger would probably end fatally -- humans are the most violent of the apes. And yet the degree of specialization that has made economic growth possible means we now depend on the efforts of many strangers for our lives.

In these days of terror and conflict, Seabright's stunning exploration of this human social experiment is timely. He points out that there has never been less violence in human history than there is now: Only 1 percent of deaths are due to violence, compared with up to 40 percent in preindustrial times. More people commit suicide than are killed by others. You are 20 times more likely to die from an infectious disease caught from a stranger on a suburban train than from a terrorist. Yet we are all, rightly, wondering about the fragility of the social order.

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