In 1833, when the University of Zurich was founded, some far-sighted students already took lectures in Economics. If these eager students were to join a classroom today, they would probably not recognize the experience: The curriculum is much broader and students benefit from direct access to cutting-edge research. Today, the Department of Economics is one of the best departments on the European mainland and a global leader in some areas of research.
From the very beginning, professors in Zurich have participated in societal developments. The foundation of the Nordostbahn and the Swiss National Bank were initiated and driven by economists from the University. The Department remains committed to contributing positively to society and the world as a whole. We do this by promoting exchange and discourse and by taking on a pioneering role in further developing the subject.
Ernst Fehr came to Zurich over 25 years ago and has played a significant role for the Department in both the abovementioned areas. In addition to his academic contributions, in particular in the areas of behavioral economics and neuroeconomics, he has been key in putting the Department and the University of Zurich on the global academic map.
Ernst Fehr, how do you define Economics?
Economics is a general behavioral science and an important tool to better understand the world we live in. Today, economists are not only concerned with taxes, exchange rates, monetary policy or growth, but with everything that has to do with human behavior: Why people divorce or become obese, how to promote child development or how to improve education and health care.
This means that modern economics is also concerned with social norms and psychological aspects. In the past, these topics were primarily covered by sociologists or psychologists. Today, economics is a broadly based behavioral and social science.
Given that we usually only choose one major subject, should one study economics, sociology or psychology?
There is no objection to any of these subjects. Economics is a social science. The strength of economics lies in its approach. The beauty of economics is that its tools are applicable to everything that has to do with human behavior. For a long time we had a relatively narrow model of human behavior. Modern behavioral economics has enriched the traditional model of the homo economicus with psychological insights, thereby massively improving the model and its predictions.
Good economics relies on the findings from psychology and sociology. However, in contrast to psychologists, economists mainly explain phenomena that have to do with social interaction. Psychology has no models that go beyond the individual. An economists’ focus is broader. We ask ourselves: "What is the outcome when a number of people who function according to the same or similar psychological laws interact with each other?
Is the idea that economics is predominantly abstract models and mathematics outdated?
The weighting of the sub-areas of economics has changed fundamentally over the last 30 years. Until the early 1980s, macroeconomic phenomena were the main focus. Macroeconomics remains, undisputedly, a central subfield. The decisive innovative impulses for the subject over the past 40 years have come primarily from the fields of applied microeconomics, experimental economic research and behavioral economics. Game theory has taken on a major role in microeconomics in particular and models and mathematics are still central to our research. However, the questions that society, and thus economists, are asking today are very different from those asked 50 or 60 years ago. How can concrete changes be made to improve health care, education or incentives? What role does trust play in business and politics? How can we change harmful social norms, such as female circumcision? How can people be encouraged to live healthier lives? What influence does international competition have on political behavior etc.? Previously, such questions only played a minor role in economics.
It sounds like a completely new subject...
Right, it is. Economics has undergone several radical changes in the last century. There was the game theory revolution that began in the late 1970s. This was followed by the empirical revolution in the late 1980s. At the beginning of the 1990s, the behavioral economic revolution and the experimental economic revolution came along. These all fundamentally changed the way economists do research and the discipline developed towards a broadly-based, methodologically sound social science.
The last two evolutionary thrusts coincide with your time here in Zurich and you are best known for your research in the fields of experimental and behavioral economics.
That is true. I was appointed to the Department in 1994 as a labor market economist and then moved towards behavioral economics. At the beginning, we were just two researchers at the Department interested in behavioral economics. Over time the Department of Economics took on a pioneering role, especially in the areas of behavioral economics and experimental economics and other areas of applied microeconomics. Today, we are one of the leading European departments in the fields of development economics, the economics of child and youth development, cultural economics, and research on international trade and labor markets.
What insights has the Department contributed to the subject as a whole?
It is not easy to influence the economics as a whole. However, we can say that Zurich's research in the field of behavioral economics, especially on fairness preferences and their economic consequences, was met with a very strong international response. It is now an accepted fact that people have social preferences and are not solely driven by selfish motives.
What will the next generation of economists deal with?
We need to incorporate cognitive limitations into the microeconomic behavior model. Our attention, perception and memory are imperfect, and this has a major impact on our behavior. Until now, economists have assumed that people have a number of alternative actions at their disposal and choose the one that seems best to them in terms of their goals - which can be selfish or selfless.
We now know that we are not able to perceive fully all of the options available to us. Our attention is limited. Imagine standing in front of the refrigerator in the supermarket with forty kinds of yoghurts. I do not know anyone who stops in front of the shelves and deliberately weighs up the taste and production method of each yoghurt. This insight is not new. However, we have only just begun to understand what this limited attention means for human behavior.
Our perception is just as incomplete. We perceive the difference between 0 and 1 to be much greater than the difference between 1000 and 1001. If something previously cost nothing and suddenly costs one Swiss Franc, then the demand for this commodity will drop sharply. If something costs 1000 Swiss Francs and the price is raised to 1001 Swiss Francs, then demand practically does not fall at all. We perceive differences in numbers to be much smaller, when the numbers are large. This insight is not new; psychologists discovered it over 150 years ago. Again, this insight has not yet been fully integrated into economic theory with all its consequences.
Finally, our memory is incomplete. Even spontaneous buying decisions have a lot to do with memory. For example, the memory of the last time you visited a restaurant and what you ordered. This memory is incomplete and biased: whom we sat at the table with, what we talked about, whether we missed the train on the way home. All these effects of incomplete cognitive processing need be mathematically modeled and their consequences empirically investigated. Integrating cognitive limitations into our models will be at the core of the next paradigm shift in microeconomics. We are still at the very early stages, however our Department is committed to taking on a pioneering role in this area of research. To do this, we are looking for strong partners to support us in this ambitious project.