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> A lot of economics seems to assume that the actors are equally rational beings but in the real world that's just not the case. Behavioral economics seems to

> A lot of economics seems to assume that the actors are equally rational beings but in the real world that's just not the case. Behavioral economics seems to bring actual human experience into economics. This is a huge misconception. Economics doesn't assume that actors are perfectly rational actors, any more than physics assumes that interactions always take place inside a frictionless vacuum. It's just one model that's used as a starting point to understand mechanical interactions.

EmbarrassedFuel 8y ago
Oxford? Sounds about right for the average PPE student...
improbable22 8y ago
It's even stronger than that: the model you derive by assuming a room full of perfectly rational agents may well be accurate, even though in reality the agents are not rational. Or at least, it may do an excellent job of describing the aggregate behaviour, even if it does terribly at describing individual's behaviour. Physics does this all the time, too. You can, indeed must, be wrong about all the microscopic details... but despite that, you can often get the correct macroscopic model.
- soVeryTired 8y ago
  This is something like Milton Friedman's 'pool player analogy'. It doesn't matter if a pool player isn't calculating all the angles and frictions when he pots a ball, because it's as if he was. So as long as your model has predictive power, unrealistic assumptions don't matter. The unfortunate part is that most models in economics have lousy predictive power.
- makomk 8y ago
  The fundamental problem with this is that the economy is made up of intelligent people who can actively find ways to exploit flaws in the model, and that - because the model's assumptions make it hard to become filthy rich - they have a direct financial incentive to do so. So, in practice, the interesting parts of the economic system all rely heavily on breaking those nice elegant assumptions.
BeetleB 8y ago
>Economics doesn't assume that actors are perfectly rational actors At the undergrad level, it often does. I had a friend who had just become an assistant professor in economics. He was teaching an undergrad class, and wanted to pose a few scenarios to them. While preparing his lecture notes, he called me up and gave me the scenarios and asked how I would behave. These were not "hard" or "wild" scenarios. Mostly day to day stuff. I gave my answers. On several of them, he told me I was giving irrational answers. This was a problem for him, because if his students answered likewise, they wouldn't support the points he was trying to make in the lecture. He and I had a similar outlook on life. So I asked him: "Would you behave differently from me?" Him: "No" Me: "So what is the value of the economic model you're teaching if even you would not behave the way the theory indicates you would?" As an aside, and this always comes up when we talk about rationality and economics. The disconnect is often that basic economics courses have a narrow view of people's motives and desires. It is often simplified to "optimizing for money" or "optimizing for time". Rarely things like "optimizing for mental stress". Pretty much everything someone does is for some perceived gain. That gain is often not what economists teach it is.
- chimeracoder 8y ago
  > At the undergrad level, it often does. Even introductory economics classes don't do this. One anecdote about a friend of yours who's an inexperienced instructor notwithstanding, if you look at any of the most widely-used and reputed introductory textbooks for undergraduates, you'll see discussion of rationality and the ways in which those assumptions can be relaxed. Just as people study Newtonian mechanics under idealized circumstances before they learn about friction and Van der Waals forces, people learn about the outcomes of rational behavior first, but it's ludicrous to judge an entire field by an outsider's perception of the topics covered during the first few weeks of an introductory course.
- tvanantwerp 8y ago
  I was once asked in an economics lecture what I would do in a particular situation. So I told the professor how I would try to proceed, only to be told that I was wrong--I would instead do this other thing that hadn't occurred to me at all.
soVeryTired 8y ago
Rational expectations models are a huge part of modern macro though. Even when models in economics don't assume rational behaviour, they tend to lean pretty heavily on assumptions of optimising behaviour - which, for me, isn't much more convincing.

EmbarrassedFuel 8y ago

Oxford? Sounds about right for the average PPE student...

improbable22 8y ago

It's even stronger than that: the model you derive by assuming a room full of perfectly rational agents may well be accurate, even though in reality the agents are not rational. Or at least, it may do an excellent job of describing the aggregate behaviour, even if it does terribly at describing individual's behaviour. Physics does this all the time, too. You can, indeed must, be wrong about all the microscopic details... but despite that, you can often get the correct macroscopic model.

soVeryTired 8y ago
This is something like Milton Friedman's 'pool player analogy'. It doesn't matter if a pool player isn't calculating all the angles and frictions when he pots a ball, because it's as if he was. So as long as your model has predictive power, unrealistic assumptions don't matter. The unfortunate part is that most models in economics have lousy predictive power.
makomk 8y ago
The fundamental problem with this is that the economy is made up of intelligent people who can actively find ways to exploit flaws in the model, and that - because the model's assumptions make it hard to become filthy rich - they have a direct financial incentive to do so. So, in practice, the interesting parts of the economic system all rely heavily on breaking those nice elegant assumptions.

BeetleB 8y ago

>Economics doesn't assume that actors are perfectly rational actors At the undergrad level, it often does. I had a friend who had just become an assistant professor in economics. He was teaching an undergrad class, and wanted to pose a few scenarios to them. While preparing his lecture notes, he called me up and gave me the scenarios and asked how I would behave. These were not "hard" or "wild" scenarios. Mostly day to day stuff. I gave my answers. On several of them, he told me I was giving irrational answers. This was a problem for him, because if his students answered likewise, they wouldn't support the points he was trying to make in the lecture. He and I had a similar outlook on life. So I asked him: "Would you behave differently from me?" Him: "No" Me: "So what is the value of the economic model you're teaching if even you would not behave the way the theory indicates you would?" As an aside, and this always comes up when we talk about rationality and economics. The disconnect is often that basic economics courses have a narrow view of people's motives and desires. It is often simplified to "optimizing for money" or "optimizing for time". Rarely things like "optimizing for mental stress". Pretty much everything someone does is for some perceived gain. That gain is often not what economists teach it is.

chimeracoder 8y ago
> At the undergrad level, it often does. Even introductory economics classes don't do this. One anecdote about a friend of yours who's an inexperienced instructor notwithstanding, if you look at any of the most widely-used and reputed introductory textbooks for undergraduates, you'll see discussion of rationality and the ways in which those assumptions can be relaxed. Just as people study Newtonian mechanics under idealized circumstances before they learn about friction and Van der Waals forces, people learn about the outcomes of rational behavior first, but it's ludicrous to judge an entire field by an outsider's perception of the topics covered during the first few weeks of an introductory course.
tvanantwerp 8y ago
I was once asked in an economics lecture what I would do in a particular situation. So I told the professor how I would try to proceed, only to be told that I was wrong--I would instead do this other thing that hadn't occurred to me at all.

soVeryTired 8y ago

Rational expectations models are a huge part of modern macro though. Even when models in economics don't assume rational behaviour, they tend to lean pretty heavily on assumptions of optimising behaviour - which, for me, isn't much more convincing.