When I tell people I’m studying economics, many respond with something like “thats great, I wish I knew more about handling money” or even more directly “now you can tell me what to do with my money!”.
Of course, as an economist I have no special knowledge about this. A financial economist could give them narrow advice, about how to maximize returns on their savings; but only after people have made their own choices about their risk preferences and time values of money.
Traditional economics sees people as rational agents, each maximizing their own utility- that is, doing the best they can for themselves, with no need for help from economists. The only domain where economists presumed to give advice based on their own special knowledge was macroeconomics, studying how all these individually rational decisions add up. And on this scale, economists can be pretty arrogant: Bryan Caplan’s The Myth of the Rational Voter describes how economists and ordinary people disagree about issues like trade and unemployment- and concludes that since ordinary people don’t believe what economists do they must be irrational.
But behavioral economics, for all its wonderful insights, opens the door to a whole new level or arrogance. Before, it was only public policy that people were asked to leave to the experts. But when the assumption that people behave rationally gets thrown out, their whole lives are now open to criticism. Thaler and Sunstein’s Nudge is only the beginning. Behavioral economics is likely to reveal more and more areas in which people seem to act irrationally in their daily lives, and economists and policy makers will be more and more tempted to intervene, telling people how to live their lives “for their own good”. We of libertarian disposition must be vigilant lest this nudge become a strongarm.