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While I love the behavioral economists (esp. Kahnemann and Tversky), a lot of psychologists have told economists for a long time that assuming basic rationality

While I love the behavioral economists (esp. Kahnemann and Tversky), a lot of psychologists have told economists for a long time that assuming basic rationality as a starting point was a fundamental error in the field. Taking it as an axiom has led to all sorts of misguided efforts and wasted time. From the article: "That's the point: It's obvious to anyone who pays any attention at all to himself or his fellow human beings that we are not maximizers, or optimizers, or logical, or even all that sensible." and "[his professors] argued that human irrationality didn't matter, for the purpose of economic theory, because it wasn't systematic."

olympus 9y ago
Assuming rational actors simplifies theory to make it within reach of undergraduate students, so it is useful to get people started in the field. Lots of things are explained by rational choice, such as the actions of many corporations (that have research analysts collecting and refining data to make better decisions). I think a lot of irrational actions taken by humans is better explained by them having incomplete information. The contrived nature of these experiments occludes their structure to the participants. Using the viral disease/antidote example: If you presented each scenario to the students at the same time and then explained how they reduced to the exact same decision, then many students (but probably not all) would assign the same price to each scenario. Instead what these experiments do is say "make a decision," then they say "make a decision on this new complicated phrasing which makes you think that the situation has changed but only I realize that it is actually the same." No surprise there when the outcome is different.
pcarolan 9y ago
Physicists assume things are spheres and use that to solve a bunch of problems. It's important to know 'why' economists use this abstraction for modeling before patently dismissing it. Economists notice that on average, people in the aggregate tend to behave rationally sometimes. Scrutiny should be applied to the assumptions, but it can still help explain economic systems.
- titzer 9y ago
  In some cases, abstraction can be done without loss of accuracy. For example, in physics we can assume that charges bounded inside a sphere can be modeled as a point charge at the center of the sphere. It's not just a simpler model; it's mathematically equivalent, and provably so.
  - ghaff 9y ago
    There are a lot of simplifications that get used in physics and engineering calculations. Ideal electrical circuits, ideal gasses, thin cylinder walls, lossless collisions, etc. etc. Whether or not a given simplification is appropriate depends on the situation (how much accuracy is needed? how close the simplification is to reality? what's the cost of not simplifying?)
    - notahacker 9y ago
      And in some respects, the simplifications are even more justified in economics than physics. Friction between atoms doesn't tend to reduce when people start writing papers finding interesting results contingent on friction being significantly above zero; January increases in stock prices do shrink to the point where they don't represent a viable trading opportunity when traders read papers by Thaler et al on lack of any informational or tax reason for "January effects"
- KingMob 9y ago
  Your point is good, but it's important to understand the differences in attitudes between them. Physics as a discipline seeks evidence and theories with greater explanatory power. Economics as a discipline seems content to favor modeling over data. Both have useful abstractions and simplifications, but only one stops short of further investigation.
- Bromskloss 9y ago
  Also, it's the natural reference to which to compare other behaviours.
- 9y ago
matt4077 9y ago
It's really not like economists don't know these things. Kahnemann got his Nobel a long time ago, after all. They also didn't grow tired to mention the flaws in the model when I learned them as an undergrad 10+ years ago. It's like people insisting physicists are ignoring wind resistance with their laws of motion. They know!
- FabHK 9y ago
  Absolutely. And of course, Kahneman and Tversky and Thaler didn't get a Nobel price for saying, "oh, hey, listen guys, actually sometimes people don't follow our standard 'homo economicus' rationality assumptions", but to study these deviations carefully (empirically and theoretically) and note when they're important and put them into a coherent framework with some predictive power (aka, a theory). On a side note, the whole libertarian agenda is largely predicated on a caricature of free markets populated by homines economici that was not even advocated by Friedman during the heyday of the Chicago school, let alone today. A professor from the Chicago business school (where Thaler is) came to HK to give a talk (and collect money from alumni), and I asked whether they still subscribed to the Chicago school, given their current research, and she just shook her head and replied "What do you think?"
  - eradicatethots 9y ago
    I’m not sure how your second paragraph is relevant, but could you say more?
    - matt4077 9y ago
      The Chicago School is the subset of economics roughly equivalent to what you think about when I say "supply-side, trickle-down, Republicans, poor people need to get off the couch". They were showing how these ideas were misunderstood not just by their opponents, but also by their fans. That part of the political spectrum has added, for example, Ayn Rand's philosophy ("greed is good"), and arrived at a rather nihilistic place where no concept, idea, institution, or emotion that isn't exclusively a "market" is denied to even exist. That's how you get people saying "taxation is theft".
ekianjo 9y ago
Because you don't need to go to the individual level to explain the behavior of crowds. That's like saying "hey, you don't know how quarks actually work in an atom, so how can you claim to understand physics at the macroscopic level?". That kind of argument does not hold very well.
- nousilias 9y ago
  I think part of what the OP is intimating at is that this prize is for something that had been well-established for some time in other ways. It's kind of like giving a Nobel Prize to a physical chemist for demonstrating that subatomic particles exist, using chemistry paradigms, when physicists had been studying quarks and leptons and whatnot already for years. Showing how this plays out in economics is important; I don't want to downplay the significance of the work from that perspective. But it feels a little bit like giving a prize for discovering something that an entire field had known about for some time. I think it says as much, if not more, about the social dynamics of science as it does about the phenomena being studied. I agree completely that the micro and macro level phenomena are not the same, but in this case the chasm isn't that great.
- KingMob 9y ago
  Umm, actually you do. I don't know about particle physics, but you absolutely need to understand real human behavior to grasp when crowds are wise (market pricing), and when crowds are foolish (asset bubbles, social proof marketing).
thanatropism 9y ago
Ehhh. For the longest while, mainstream macroeconomics was grounded on a few insights about irrational behavior. Pre-Keynesian "naive rationality" theory thought recessions would cure themselves as falling demand made prices fall: therefore, recessions caused by "general glut" or "overproduction" would never happen; there would never be "involuntary unemployment". Keynes and others argued that under systemic falling demand/rising unemployment people would go chicken little and reduce their consumption. That kind of thinking was very very useful and was the basis of how nearly every nation dealt with the Great Depression. To a great degree, it's still reflected in current fiscal and monetary policies. Textbook macro 101 is actually all behavioral theory: people either consume a fraction of their income (Keynes), of their lifetime income (Modigliani) or of their "permanent income" (the one they're used to in the average and expect for the future. But this basic Keynesian recipe of assuming consumers behave according to heuristics ran into some rough sand from the 70s on; and a few powerful ideas on the limitations of generalizing psychological insights arose of this period. I think the most powerful of these is the Lucas critique. To simplify, the Lucas critique says that any attempt to exploit the heuristic nonrationality that economic models in general assume will cause people to change their heuristics. So either economics is fundamentally and hopelessly bogus, or any predictable behavior has to come out of a fixed-point iteration process that may lead to the wrong platonic ideal of "rationality" but leads to Brower's fixed point theorem and game theory. Thaler comes at the other end of this arc. Has the pendulum again swung too far? World Bank economists have allegedly been misusing DSGE models, for example; but this is more of an institutional flaw that gives entire staffs these crystal balls they aren't. The Lucas critique itself says these models can never predict the future. So let's recapitulate the pendulum: Ricardo and Malthus used to argue in the 19th century about the possibility of a persistent glut, what the Marxists call an "overproduction crisis". Mixed examples had been seen, but nothing like a developed capitalist economy existed. Then came the Great Depression and the Malthusians rose to the task and fixed the damn thing with the spit and half-baked behavioral psychology you can read in the "General Theory" by Keynes. This works until it doesn't (note that during this period people have also had increasing access to information, etc. rather than behaving as blind mole rats as they might in Ricardo's time) and psychological ad-hockeries fall out of fashion. Now, in this great arc: Thaler, new Nobel laureate, claims that you can slightly nudge people from Lucasian fixed points. Sure, maybe. My boss is a big fan. The pendulum swings.
r00fus 9y ago
"Assume rational actors" in econ ≈ "assume a perfect sphere" in physics.

olympus 9y ago

Assuming rational actors simplifies theory to make it within reach of undergraduate students, so it is useful to get people started in the field. Lots of things are explained by rational choice, such as the actions of many corporations (that have research analysts collecting and refining data to make better decisions). I think a lot of irrational actions taken by humans is better explained by them having incomplete information. The contrived nature of these experiments occludes their structure to the participants. Using the viral disease/antidote example: If you presented each scenario to the students at the same time and then explained how they reduced to the exact same decision, then many students (but probably not all) would assign the same price to each scenario. Instead what these experiments do is say "make a decision," then they say "make a decision on this new complicated phrasing which makes you think that the situation has changed but only I realize that it is actually the same." No surprise there when the outcome is different.

pcarolan 9y ago

Physicists assume things are spheres and use that to solve a bunch of problems. It's important to know 'why' economists use this abstraction for modeling before patently dismissing it. Economists notice that on average, people in the aggregate tend to behave rationally sometimes. Scrutiny should be applied to the assumptions, but it can still help explain economic systems.

titzer 9y ago
In some cases, abstraction can be done without loss of accuracy. For example, in physics we can assume that charges bounded inside a sphere can be modeled as a point charge at the center of the sphere. It's not just a simpler model; it's mathematically equivalent, and provably so.
- ghaff 9y ago
  There are a lot of simplifications that get used in physics and engineering calculations. Ideal electrical circuits, ideal gasses, thin cylinder walls, lossless collisions, etc. etc. Whether or not a given simplification is appropriate depends on the situation (how much accuracy is needed? how close the simplification is to reality? what's the cost of not simplifying?)
  - notahacker 9y ago
    And in some respects, the simplifications are even more justified in economics than physics. Friction between atoms doesn't tend to reduce when people start writing papers finding interesting results contingent on friction being significantly above zero; January increases in stock prices do shrink to the point where they don't represent a viable trading opportunity when traders read papers by Thaler et al on lack of any informational or tax reason for "January effects"
KingMob 9y ago
Your point is good, but it's important to understand the differences in attitudes between them. Physics as a discipline seeks evidence and theories with greater explanatory power. Economics as a discipline seems content to favor modeling over data. Both have useful abstractions and simplifications, but only one stops short of further investigation.
Bromskloss 9y ago
Also, it's the natural reference to which to compare other behaviours.
9y ago

matt4077 9y ago

It's really not like economists don't know these things. Kahnemann got his Nobel a long time ago, after all. They also didn't grow tired to mention the flaws in the model when I learned them as an undergrad 10+ years ago. It's like people insisting physicists are ignoring wind resistance with their laws of motion. They know!

FabHK 9y ago
Absolutely. And of course, Kahneman and Tversky and Thaler didn't get a Nobel price for saying, "oh, hey, listen guys, actually sometimes people don't follow our standard 'homo economicus' rationality assumptions", but to study these deviations carefully (empirically and theoretically) and note when they're important and put them into a coherent framework with some predictive power (aka, a theory). On a side note, the whole libertarian agenda is largely predicated on a caricature of free markets populated by homines economici that was not even advocated by Friedman during the heyday of the Chicago school, let alone today. A professor from the Chicago business school (where Thaler is) came to HK to give a talk (and collect money from alumni), and I asked whether they still subscribed to the Chicago school, given their current research, and she just shook her head and replied "What do you think?"
- eradicatethots 9y ago
  I’m not sure how your second paragraph is relevant, but could you say more?
  - matt4077 9y ago
    The Chicago School is the subset of economics roughly equivalent to what you think about when I say "supply-side, trickle-down, Republicans, poor people need to get off the couch". They were showing how these ideas were misunderstood not just by their opponents, but also by their fans. That part of the political spectrum has added, for example, Ayn Rand's philosophy ("greed is good"), and arrived at a rather nihilistic place where no concept, idea, institution, or emotion that isn't exclusively a "market" is denied to even exist. That's how you get people saying "taxation is theft".

ekianjo 9y ago

Because you don't need to go to the individual level to explain the behavior of crowds. That's like saying "hey, you don't know how quarks actually work in an atom, so how can you claim to understand physics at the macroscopic level?". That kind of argument does not hold very well.

nousilias 9y ago
I think part of what the OP is intimating at is that this prize is for something that had been well-established for some time in other ways. It's kind of like giving a Nobel Prize to a physical chemist for demonstrating that subatomic particles exist, using chemistry paradigms, when physicists had been studying quarks and leptons and whatnot already for years. Showing how this plays out in economics is important; I don't want to downplay the significance of the work from that perspective. But it feels a little bit like giving a prize for discovering something that an entire field had known about for some time. I think it says as much, if not more, about the social dynamics of science as it does about the phenomena being studied. I agree completely that the micro and macro level phenomena are not the same, but in this case the chasm isn't that great.
KingMob 9y ago
Umm, actually you do. I don't know about particle physics, but you absolutely need to understand real human behavior to grasp when crowds are wise (market pricing), and when crowds are foolish (asset bubbles, social proof marketing).

thanatropism 9y ago

Ehhh. For the longest while, mainstream macroeconomics was grounded on a few insights about irrational behavior. Pre-Keynesian "naive rationality" theory thought recessions would cure themselves as falling demand made prices fall: therefore, recessions caused by "general glut" or "overproduction" would never happen; there would never be "involuntary unemployment". Keynes and others argued that under systemic falling demand/rising unemployment people would go chicken little and reduce their consumption. That kind of thinking was very very useful and was the basis of how nearly every nation dealt with the Great Depression. To a great degree, it's still reflected in current fiscal and monetary policies. Textbook macro 101 is actually all behavioral theory: people either consume a fraction of their income (Keynes), of their lifetime income (Modigliani) or of their "permanent income" (the one they're used to in the average and expect for the future. But this basic Keynesian recipe of assuming consumers behave according to heuristics ran into some rough sand from the 70s on; and a few powerful ideas on the limitations of generalizing psychological insights arose of this period. I think the most powerful of these is the Lucas critique. To simplify, the Lucas critique says that any attempt to exploit the heuristic nonrationality that economic models in general assume will cause people to change their heuristics. So either economics is fundamentally and hopelessly bogus, or any predictable behavior has to come out of a fixed-point iteration process that may lead to the wrong platonic ideal of "rationality" but leads to Brower's fixed point theorem and game theory. Thaler comes at the other end of this arc. Has the pendulum again swung too far? World Bank economists have allegedly been misusing DSGE models, for example; but this is more of an institutional flaw that gives entire staffs these crystal balls they aren't. The Lucas critique itself says these models can never predict the future. So let's recapitulate the pendulum: Ricardo and Malthus used to argue in the 19th century about the possibility of a persistent glut, what the Marxists call an "overproduction crisis". Mixed examples had been seen, but nothing like a developed capitalist economy existed. Then came the Great Depression and the Malthusians rose to the task and fixed the damn thing with the spit and half-baked behavioral psychology you can read in the "General Theory" by Keynes. This works until it doesn't (note that during this period people have also had increasing access to information, etc. rather than behaving as blind mole rats as they might in Ricardo's time) and psychological ad-hockeries fall out of fashion. Now, in this great arc: Thaler, new Nobel laureate, claims that you can slightly nudge people from Lucasian fixed points. Sure, maybe. My boss is a big fan. The pendulum swings.

r00fus 9y ago

"Assume rational actors" in econ ≈ "assume a perfect sphere" in physics.