The Goofiness of Behavioral Economics

Great Debates
1

Behavioral economics has hit the big time in the last couple years, with popular books like Freakonomics and Predictably Irrational hitting the bestseller lists and experts appearing on TV to explain how systematic human error caused the great recession-depression-thingamajig of 2007-9. I’ve read the above-named books and a number of articles on the field and I feel that it’s all pretty silly. Now I don’t accuse the entire field of being nonsense, like evolutionary psychology or memetics. Some behavioral economics is false, and that’s somewhat silly, but the really silly parts are the true parts.

Here’s my history of the field. About two centuries ago, give or take, a handful of thinkers created economics as we know it. The entire field with all its organizations, theories, and departments was based on certain assumptions. For example, there’s the assumptions that all humans act in their own-self interest, that more money and more goods always makes as happier, that doing more work makes us less happy, that we make choices of what to buy based on innate and interior preferences, etc… The problem is that none of these assumptions are true or close to true. Much of the human race has spent the past two centuries screaming (figuratively) at economists that their assumptions are not true.

Enter the late 20th century and along come the behavioral economists, suddenly noticing that humans don’t actually behave the way that classical economic theory says they behave. So the behavioral economists do a few experiments, write up the results, and proudly publish their groundbreaking discovery that the assumptions of classical economics are all wrong. And they expect to be admired for this, though all they’ve really done is prove what most of the world has always known. Dan Ariely, for example, explains that he works in “the new field of Judgment and Decision-making”. The capital letters may be new, but judgment and decision-making is the oldest field of human inquiry. They wrote about judgment and decision-making in medieval times. It’s in the Bible. It’s in Aristotle and Plato and all those other ancient Greek guys.

Let’s take just a few examples. Freakonomics describes a study which proved that realtors devote more energy to selling their own homes than to selling their clients’ homes. This is supposed to “dazzle” me, according to the New York Times, but instead it just brought a shrug. Of course they do. Why wouldn’t they? Wouldn’t you do the same if you were a realtor?

Predictably Irrational describes an experiment in which undergraduates made one set of decisions in a plain office setting, but a vastly different set when they were sexually aroused by internet porn. From this, the author learned that people who are sexually aroused make different decisions from those who aren’t. Well I could have told them that without any need for a computer protected by shrink wrap.

And so forth. As I see it, these people are proving what everyone else already knows. Why should we be impressed?

2

General economics is right because it otherwise it wouldn’t have been able to have effectively modified the way that people live. Saying that behavioral economics disproves general macroscopic economics is like saying that the selective breeding of dogs by humankind disproves natural selection.

Anyways, the great odds are that you’re only bringing any of this up because someone pointed out some bit of fluff that you want to disprove so you need to get out and haruff and puff about how you’ve disproved it, since the mere act of making any argument of any level of ability which says that something is wrong counts as a full, categorical disprove.

You may as well just say which particular behavioral economics theory it is that has riled your attention, denounce it, and get it over with.

And yes, there’s a decently good chance that whatever it is, is wrong or could use some further research and study, but the point will remain that behavioral economics is based on careful research that’s been conducted using the scientific method. Any argument you can make short of failing to replicate the findings in a sizable study or coming up with a model that has greater predictive value is ultimately just huffing and puffing. They might be wrong, but it’s still science and only science can show which bits need to be shuffled and fixed.

3

As I recall, that bit in Freakonomics covered how long a real estate agent would leave their house on the market versus yours. It then goes on to show how much the difference in price could impact the agent vs. the increase in commission from selling yours for a little more. What it did was quantify the difference, and tie it to rational Economic decision making on the part of the agent.

They also pissed off a lot of REALTORs.

4

That set of things that are true and the set of things that seem obvious are not always the same. If all behavior economics did was show which pieces of common sense wisdom were true and which false, it would still have value. But it also shows things that are not so common-sensical.

I recently heard an interview with Dan Ariely about the Wall Street bonus issue. His research showed that people performed worse when they had large rewards dependent on results than when they were payed a lower amount no matter what. Basically, large performance based rewards make for worse performance. How is that common sense?

Jonathan

5

Marxists effectively modified the way that a lot of people live. Does that make Marxism right?

If I run into anyone who says that behavioral economics disproves general macroscopic economics, I’ll let them know.

Let me offer a suggestion. Why don’t you read my original post, and then if you want to respond to anything that I actually said, you’ll be able to do so. As things stand, I suspect that you only read the thread title and then wrote a response based on what you thought was in the original post.

6

The level of ignorance of the original post is simply astounding.

First, the popular books about this subject are fun, but the real way to understand what is going on is to read the peer-reviewed papers presenting more than just a few experiments. In fact many in the field are trying to change its name to experimental economics, which more clearly describes it.
Judgment Decision Making doesn’t deserve the scare quotes. It is getting to be a large and very active area of psychology, and there is a major conference on it. Please show me the experiments on JDM described in the Bible. JDM is not a bunch pf psychologist bsing about what people will do, but involves controlled experiments measuring what people do in certain well defined situations.
No one is claiming this overturns classical economics. What has been demonstrated is that some basic assumptions on what economic actors do in choice situations are not true. People don’t make rational choices at all times. This may not be news to you, but it was to our former Fed chairman.

You might know that aroused men will not act rationally, but it appears that those teaching abstinence only education do not. Sometimes you need research results to prove the obvious to those ideologically opposed to it. Look at the opponents of regulation, some right here on this board, who say that “I wouldn’t get a subprime exploding mortgage: would you? Would anyone?” The answer is obviously that people do and did, and the lack of understanding of this that led to the right opposing regulation helped to blow up the economy.
Note that classical economist Paul Krugman admitted that the behavioral economists were right and the classical ones blew it. That doesn’t mean that behavioral economics can replace classical economics (Thaler prides himself on not knowing the math) but that the classical economists had better listen.

I can assure you that the reaction of the classical people to the initial findings was not “of course, how could we be so stupid” but denial. I’ve got lots of other good examples of interesting results from our tutorial on this subject.

Oh, and a cite from 30 or 50 years ago from someone respected in the field saying Adam Smith was wrong?

7

Yeah, that’s really a bit silly. I mean, after all, their genetic makeup compels them to alter their behaviour in the presence of certain stimuli!

8

As a layperson very interested in behavioral economics, where can I find these papers?

9

Your “history” of the field makes no sense at all.

10

So the argument is that behavioral economics is so obvious that its goofy?

I suppose you’re not a fan of Duchamp either.

11

There are a lot of references in Thaler’s book Nudge. A lot of the papers are hidden inside the pay sites of the journals. My daughter is working in the field, so she sends me the papers I need to read for the papers we write together.

I’ve been applying these concepts to engineering, specifically IC design. We’ve had two papers published, we taught a pretty well attended tutorial in November, and I did an additional paper on my own (which got a best paper award) and ran a panel at a conference. But it is a hobby for me.

12

Speaking of genetic makeup, loss aversion has been detected in chimps. You have two choices of treats, say a banana and a tube filled with peanut butter. You determine which of the two a chimp prefers. You then give him the other one, let him keep it for a little bit, and then offer him the one he prefers. He won’t switch. The fact of possession makes something more valuable.

13

What Voyager said.

Classical economics (“rational” decision making) works extremely well in broadening our understanding in a large number of contexts. It’s a good, useful tool. But the tool has limitations, and anyone who can point out formally where the limits of that tool stand is doing the work of the angels.

14

Wikipedia is often our friend if you’d like to read up on the history of (and definition of) economics. Seriously, dude, I think you need to do both.

Oh, and the above was meant as a reply to the original post. Sorry if I gave a different impression

15

The next thing you will tell me is that Newton’s Laws of Motion is a good everyday tool, but it has limits and/or exceptions also.

16

C’mon, man, everyone knew that time dilated as you approach c. It’s obvious!

17

I read “The Idiot’s Guide To Einstein.” Physics is so obvious, it’s goofy!

I hope they have an Idiot’s Guide to Molecular Biology. This thing where you can reduce a field of study to goofiness by reading the shiny book on the display table at Chapters is pretty awesome. And people waste all those years in school.

18

No, he was saying that the argument against the idea of general human selfishness is in behavioral economics, but that the argument against behavioral economics is that they simply say obvious things, like how people are selfish.

19

Just to be nitpicky, I haven’t seen anything in behavioral economics claiming that we aren’t selfish. What it does say is that we make choices based on some irrational things, and that we don’t act to maximize our benefit even if we think we are. One of the issues in classical economics is that making the optimal choice in a given situation may require a level of math and information above that of MBA students, let alone the average person in the street. Perhaps this should be obvious, but it has stood up for over 200 years.

20

Being the first person to lay out an obvious argument against a well-accepted doctrine is not a bad thing.