Behavioral Economics

Recently in the New York Times Business section, Jonathan Knee reviewed Misbehaving: The Making of Behavioral Economics, a forthcoming book by Richard Thaler of the University of Chicago. I look forward to reading Misbehaving because I’m interested in the similar critique behavioral economists and causal-realist economists have for the methods and results of mainstream economics.

Mainstream economics substitutes robots for humans in their highly mathematized models:

To achieve the same mathematical precision of hard sciences, [mainstream] economists made a radically simplifying assumption that people are “optimizers” whose behavior is as predictable as the speed of physical body falling through space.

We take derivatives of smooth, knowable utility functions when we walk down the grocery store aisles, selecting some items and not others, according to the mainstream orthodoxy. Humans are rational because they are calculators.

Austrian and behavioral economists see humans as more complex and organic and, well, human.

Austrians take a causal-realist approach. When we are on Aisle 5, we survey heterogeneous goods and their prices and find their relative spots on our preference ranking. If we prefer the marginal unit to the per-unit price, we buy; if we prefer to keep the money in our pocket instead of buying the marginal unit of whatever we’re evaluating, we keep walking. Humans are rational because we have reasons for acting–namely, preferences.

Behavioral economists dislike the mainstream approach as much as Austrians, but veer into psychology instead of the logic of action. On Aisle 5, we’re more tired than we were on Aisles 1-4, and so we may not think all the way through our buying choices. We may not grab the fresh fruit that we would prefer to canned fruit because we’ve already put the canned fruit in our cart, and have grown psychologically attached to it. We grab the name brand items with pretty labels even if they are exactly the same as the store brand, but more expensive. We make mistakes and have context-related anomalies in the way we make decisions. Humans are irrational.

I find the results and method of behavioral economics intriguing and insightful. The only problem I have is calling it “economics”. Economics is a set of universal truths and logically certain causal relationships. There is no such thing as “grocery store economics” or “name brand vs. store brand economics”, just economics.

The particular psychological phenomena that happen when humans enter grocery stores and walk down the aisles is interesting, and may help predict what people are going to buy, but these particulars aren’t economics. Economics presupposes the particulars and allows all of them to work in each situation through preferences. The economics of shopping on Aisle 5 is the same as the economics of shopping on Aisle 6. It’s the same economics whether you are looking for jobs, looking to retire, buying stocks, buying a sandwich, mowing your lawn, or vacationing as far away from home as possible.

The laws of economics apply to everyone, everywhere, any time they make a conscious decision. The results of psychology apply to particular situations and types of people.

As such, behavioral economists have teamed up with psychologists in their quest to predict human behavior (also not economics):

It is true that interdisciplinary collaborations often yield least-common-denominator pabulum. But sometimes, as with the work of academics like Professor Thaler who are willing to question even the most deeply held institutional convictions, it has led to genuine advances in how we view the world.

This is true. Both psychology and mainstream economics needed more grounding in the real world, and so there may have been some “synergy” in their “merger”. But it may be more of an acquisition than a merger, if you hold to stricter boundaries on economics like I do.

Either way, the mainstream has got to go. The mathematical models may look clean and tidy, but they remove the “human” from “human action”. They’ve made a mess of the field that’s supposed to make sense of human choices, not over-complicate them. Austrians and Behavioralists reassert the human, albeit in different ways.

If the deepest disagreements we (causal-realists) have with behavioral economists are just semantics (What is economics? What is rationality?), then we can certainly team up with them to topple the reigning monarchy of mathematical mumbo-jumbo.

The “misbehaving” of Professor Thaler’s title is supposed to refer to how human actions are inconsistent with rationalist [mainstream] economic theory. It could just as easily refer to his own professional misbehavior in rejecting the prevalent worldview of academic economists at the time. Although not without serious risk to any aspiring academic, hopefully, his book and his career will inspire more miscreants across a wide range of intellectual specialties.

Cheers to that.

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3 Comments

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3 responses to “Behavioral Economics

  1. Extremely interesting article, I agree that individual action does not remotely resemble economic modeling. However, I would be cautious to assume that humans are irrational, for ‘rationality’ is a subjective designation based on knowledge. Ancient tribes in Africa refused to have pictures taken because they became convinced that anything that could capture their image was in fact stealing part of their soul. While this may seem irrational for someone in the Western culture, it is in fact, a byproduct of the ignorance on the mechanics of how photography works.
    Economists have a superior understanding of the mechanics of supply and demand, thus, producing a biased expectation on ‘rational’ behavior. What is even more interesting about this paradox, is that any simpler assumption on individual behavior would seem ‘irrational’ to any economist because of their level of knowledge.

    Like

  2. Reblogged this on Forwardeconomics and commented:
    Extremely interesting article, I agree that individual action does not remotely resemble economic modeling. However, I would be cautious to assume that humans are irrational, for ‘rationality’ is a subjective designation based on knowledge. Ancient tribes in Africa refused to have pictures taken because they became convinced that anything that could capture their image was in fact stealing part of their soul. While this may seem irrational for someone in the Western culture, it is in fact, a byproduct of the ignorance on the mechanics of how photography works.
    Economists have a superior understanding of the mechanics of supply and demand, thus, producing a biased expectation on ‘rational’ behavior. What is even more interesting about this paradox, is that any simpler assumption on individual behavior would seem ‘irrational’ to any economist because of their level of knowledge.

    Like

  3. Pingback: Link Parade: 5.29.15 | Econ Off the Shelf

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