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The Critics’ Misplaced Love for Behavioral Economics

Critics love behavioral economics because they think it gives traditional economics the comeuppance it deserves. Antara Haldar, writing recently in The Atlantic, dishes up the standard fare:

Homo economicus, created to personify the supposedly rational way humans behave in markets, quickly came to dominate economic theory.

But then in the 1970s, the psychologists Daniel Kahneman and Amos Tversky made a big discovery. The academics drew on psychological evidence to show that the actions of human beings deviate from the ironclad rationality of Homo economicus in all sorts of ways.  . . . These insights led to the founding of a new field, behavioral economics which became a household name 10 years ago, after Cass Sunstein and Richard Thaler published the best-selling book, Nudge and showed how this new understanding of human behavior could have major policy consequences.

Richard Thaler merited the Nobel Memorial Prize for his work. But Haldar emphasizes discontinuity where there is mainly continuity. “Nudge” is not a theory, and behavioral economics asserts no general “understanding of human behavior,” new or otherwise. It offers an incremental contribution to economics, and doesn’t come close to the paradigm shift its fans assume.

A big part of the problem is Haldar’s constricted styling of traditional economic theory. She paints in stark colors to highlight the discontinuity between behavioral economics and conventional economics, but the starkness misleads. Haldar writes,

[Homo economicus] is infinitely rational, possessing both unlimited cognitive capacity and access to information, but with the persona of the Marlboro Man: ruggedly self-centered, relentlessly materialistic, and a complete lone ranger. Homo economicus, created to personify the supposedly rational way humans behave in markets, quickly came to dominate economic theory.

Haldar holds a Ph.D. in economics, so she must know this assessment caricatures modern microeconomic theory beyond recognition. In her telling, economists assume people are “infinitely rational.” This means they possess “both unlimited cognitive capacity and access to information.” On this view, people make irrational decisions when they do not have full information, or when they face uncertainty, or when they need to search or learning.

As Haldar surely knows, there are entire subfields in economics, all entirely mainstream, devoted to understanding decision making with incomplete or imperfect information, decision making under uncertainty, and when people search and learn. The field of computational economics allows scholars to impose knowledge and cognitive constraints on actors, operating as “finitely rational” as the converse of Haldar’s curious phrase can imply. All of these theories proceed under the standard rationality assumption; all inconsistent with Haldar’s view of the assumptions mainstream economics makes.

Haldar’s suggestion that rationality requires full information conflates making a decision which one regrets ex post with making an irrational decision. But even very smart bets ex ante can fail to materialize ex post. These can nonetheless eminently reasonable. For example, very few people would turn down this gamble: For a wager of $100 you might receive $100,000 with 90 percent probability and $0 with ten percent probability. For most of us that’s an eminently reasonable gamble; the expected payoff is far greater than the wager. Many risk-averse people would be willing to take this gamble. The fact that ten percent of us end up with a payoff of nothing in return for our wager of $100 does not mean the gamble was irrational for those ten percent. It was a rational gamble ex ante, we just happened to lose. If offered the same gamble again, however, we would take it, no question.

Haldar further suggests mainstream economists assume people are “Ruggedly self-centered . . . and a complete lone ranger.” But what about the theory of games, distinctive because it describes interaction between two or more people? The point is precisely that people in groups make decisions differently than the Lone Ranger or Robinson Crusoe. Or the huge literature in economics on altruism?

Consider too Haldar’s assertion that economic theory paints actors as “relentlessly materialistic.” Even if one does not consider rational choice models in political science or sociology, even in economics, scholars model individuals seeking to maximize achievement of policy preferences, which are manifestly non-materialistic. If of interest, economic models can easily accommodate altruistic or spiritual preferences as well. That most economists are substantively interested in understanding economic behavior means they make simplifying assumptions about goals, such as work, earn, and consume, to make analysis easier. Those assumptions are conveniences, however, not ontologies.

When economists assume people seek to maximize income (relative to the constraints and trade-offs they face), they have no need to make assumptions regarding why people do this. While some people may seek to maximize income to spend on themselves, others may seek to maximize income to provide for their families, or to give away to the poor or to save the planet. Economics makes no assumptions about these types of personal goals. As the British evangelist, John Wesley, famously preached, “make all you can . . . save all you can . . . give all you can.” A decent microeconomic model of an individual choosing between labor and leisure works just as well for this person as for the hedonist.

But none of the advances in economics regarding information, uncertainty, or the like flow from behavioral economics. Mainstream economics abandoned the view of human rationality Haldar ascribes to it some time ago, relaxing their views to encompass a wide range of actors’ motives and assumptions. All this work is consistent with traditional economic views of rationality.

In the next post I’ll chat a bit about the modeling process in economics (and rational choice theory more generally) and comment on the introductory classes in economics that Haldar criticizes in light of this process.

Reader Discussion

Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.

on December 19, 2018 at 10:56:50 am

[…] James Rogers busts some myths about behavioral economics. […]

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Image of Some Links - Cafe Hayek
Some Links - Cafe Hayek
on December 19, 2018 at 13:04:09 pm

"Even if one does not consider rational choice models in political science or sociology, even in economics, scholars model individuals seeking to maximize achievement of policy [personal aspirations] preferences, which are manifestly non-materialistic."

After many years and some sparse reading of economic tracts / theories, etc, I have come to the conclusion that the best, most astute, skilled and knowledgeable exponents of economic wisdom are "MAD MEN", - marketing departments. It would appear that these professionals are in possession of that certain knowledge of what impels an individuals economic choice. It is also clear that they understand that "rationality' plays a less significant role in those choices than doctrinaire economists would suppose; and that hidden desires, urges, aspirations to higher status, etc are what may ultimately determine that choice.

I hate Lexus!
Why?

The cars are probably neither better nor worse than a Cadillac (Consumer reports notwithstanding). It is their TV ads that disturb me.
A series of images of the Lexus XYZ accompanied by a Brit accented snooty voice that promises elevated status, a sense that one too could be as refined as this snooty English Babe, if only one would buy a Lexus.

It works, kiddies! And the purchaser pays an extra $45,000 for a higher end Toyota - BUT, they are now a member of the "refined" class. Or think (observed yesterday) "buttless" denim jeans. Rational? - Hardly.

(I think I will take my 23 year old 4 cyylinder Ford Ranger out for a spin.)

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gabe
on December 20, 2018 at 11:23:47 am

I have yet to see what behavioral economics offers that is not already intensively studied, and hss been intensively studied for a long time, by countless numbers of people engaged in marketing.

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Wayne Abernathy
on December 20, 2018 at 11:56:41 am

Professor Rogers is spot on. When the editor of Reason magazine asked me to comment on Thaler's Nobel I had not encountered his work, and had only mildly critical opinions about behavioral economics. After reading Thaler, I changed my mind: “The Applied Theory of Bossing People Around: Thaler’s Nobel.” March 2018, pp. 8-9. Behavioral economics is a serious threat to liberty. But after all, economic policy has been for a century or so---ever since economists stopped being worldly philosophers and took up social engineering!

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Image of Deirdre Nansen McCloskey
Deirdre Nansen McCloskey
on December 20, 2018 at 14:20:55 pm

Ms Mc Closkey:

Well said, re: "social engineering."

We DO have so manyothers so engaged, and quite often with somewhat more prosaic styles.

BTW:

Read your commentary on "How Growth Happens: Innovism, etc."

Rather liked it BUT I cannot escape the feeling that innovism of which you write presupposes a certain confluence of cultural conditions that permits, if not impels, humans to view themselves as "individuals", by this I do not mean the currently faddish bastardized definition of individual but rather as a self perceived *agent*, both desirous and capable of creating / influencing events / commerce, etc.

I wonder if you would care to write something for LLB (if the LLB Masters were willing) that addresses the link (if any in your view) on the intersection / interplay of "innovism" & liberty, rooted of course in an individuals sense of that.

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gabe
on December 20, 2018 at 19:21:44 pm

McCloskey on Thaler (and group vs. individual determinations?):

https://reason.com/archives/2018/02/11/the-applied-theory-of-bossing

Kling thinks "Economics" may be on its way to becoming a branch of "Sociology."

It is not emphasized, but perhaps McCloskey senses that a cadre of "examiners of the economic nature of conduct" have a high desire to join the Managerial Class as intervenors (by whatever means available) in the determinations of, and relationships among, individuals.

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R Richard Schweitzer
on December 20, 2018 at 19:36:29 pm

I should have added that McCloskey, unlike so many others, does NOT fail to note the link to individual liberty.

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R Richard Schweitzer
on December 20, 2018 at 20:42:51 pm

I fully agree with all of these critics of behavioral economics. It has little of value to offer, and it's a threat to reason and liberty. And there's another point that strikes me that other observers seem to miss.

Cost is the next best alternative to an action or choice. Behavioral economists deny that people choose rationally. In doing so they deny the meaningfulness of cost, it *isn't* the next best alternative and has no particular order relation to decisions and things chosen. Any costs and any prices are arbitrary, if one really buys behavioral economics, and human beings don't economize at all. I don't think even die-hard behavioral economists can maintain this position consistently, but behavioral economics ought instead to be called anti-economics.

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Image of Charles N. Steele
Charles N. Steele
on December 21, 2018 at 05:47:10 am

[…] of mainstream economics often style the implications of behavioral economics as something much bigger than they are. A big part of the problem is that these critics misunderstand the assumptions economists and […]

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Image of Assumptions in Economics Are Like Maps
Assumptions in Economics Are Like Maps
on November 29, 2019 at 15:37:49 pm

You are right on the money re social engineering. Behavioral Economics is the discipline's contribution to post-modernism.

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David French

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