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Archive for 15/02/2011

Behavioral Economics

There is a piece in Slate (here) by Tim Hartford, recopied from The Financial Times, on Behavioural Economics.

Behavioral economics has never been hotter. It’s not just the success of books such as Nudge, Predictably Irrational, and Basic Instincts, but the political influence of the field: One of Nudge’s authors, Cass Sunstein, runs the Office of Information and Regulatory Affairs for Barack Obama, and his co-author Richard Thaler has been advising David Cameron’s new Behavioral Insight Team, based in the Cabinet Office.

A simple summary of behavioral economics——I’ve borrowed this one from the Guardian—is that it is the study of “how people actually make decisions rather than how the classic economic models say they make them.” But this approach is now under attack, from Gerd Gigerenzer, a psychologist, and Nathan Berg, an economist, and they argue that behavioral economics is not nearly as realistic as its boosters claim. While it does study what decisions we make, the very last thing it does is study how we make them—and as a result it is even more wedded to silly accounts of the way human beings think than its neoclassical rival.

…Consider the human response to risk. Neoclassical economics says that we act as if considering all possible outcomes, figuring out the probability and utility of each outcome, multiplying the probabilities with the utilities, and maximizing expected utility. Clearly we do not in fact do this—nor do we act as if we do.

Behavioral economics offers prospect theory instead, which gives more weight to losses than gains and provides a better fit for the choices observed in the laboratory. But, say Berg and Gigerenzer, it is even more unrealistic as a description of the decision-making progress, because it still requires weighing up every possible outcome, but then deploys even harder sums to produce a decision. It may describe what we choose, but not how we choose.

This is tough on behavioral economists, because in order to be taken seriously by other economists they have had to play the optimizing game.

Behavioural Economics has been bothering me. Why ignore neurobiology and cognitive neuroscience and start a parallel ’science’? It just doesn’t make sense, and so I have been trying to think of what is there in the current neuroscience that economists cannot accept. I thought of lots of things but the most convincing I have come up with is very simple. Economist are looking for an equation/s for human behaviour. They want an explanation, yes, but one that can be incorporated in their mathematical models of the economy so that they can predict how the market will react in any situation. An theory that is not mathematically amenable to their modeling is going to be useless to them.

In the search for an explanation of consciousness, I will not expect much enlightenment from the behavioral economists. They are looking for a different sort of explanation.