I had this in the “Drafts” folder and forgot to put it out there. A year or so old, but still applicable. The new age of, ahem, big data is really changing the way economists work.
A nice article over at Bloomberg (6/8/2012) has some good details, but it’s most interesting to watch how some economist are embracing the new data as confirmation of their models, and how other economists are looking for even more excuses when the data doesn’t align with their own models.
The shift toward an even more empirically grounded economics doesn’t mean theory is less important. When facts were expensive and scarce, the role of theory was to “fill in” for missing data. Now, its purpose is to make sense of the vast, sprawling and unstructured terabytes on our hard drives.
The data revolution is, however, changing our theories — specifically the way we choose to model how people behave. For decades, economists assumed that people made calculated, rational decisions. Without better data to help structure our understanding of people’s preferences, it was a safe and convenient choice, even if it was often wrong.
With new data on everything from how we choose our retirement savings plans to how NBA referees call fouls, we have learned to look beyond “homo economicus.” We have a much better grasp of the systematic flaws in reasoning that often get people into trouble. We know they have a hard time committing to do difficult things in the future — to go to the gym, to lose weight, to save. So we know people can benefit from policies, such as making 401(k) contributions automatic unless they opt out, that help them commit to good behavior.
I think the most important thing there is exactly the relationship between the data and the model of homo economicus. Although homo economicus is a nice simple model of how economists would like people to behave in a marketplace, the reality is that the model doesn’t even come close for anything other than the trivial case.