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Economics is a subject I regrettably evaded throughout school. Now I find it interesting, but I'm curious about how much of its edifice is built upon the dubio

by pohl 15y ago

Economics is a subject I regrettably evaded throughout school. Now I find it interesting, but I'm curious about how much of its edifice is built upon the dubious notion of a "rational actor". That is: how much of economics would remain if that assumption were swept away?

ghaff 15y ago
Traditional economics, quite a bit--though most of the principles are still valid as a first approximation. But the various irrational ways in which people make decisions is the fundamental concept behind behavioral economics which has gained considerable attention over the past 20 years or so.
- jerf 15y ago
  I think one common error people make is to say "Oh, well, rational actors are wrong therefore I can throw rational actors out of the model entirely, everything goes, nobody knows anything, case closed." As you say, it's still a good first approximation, and to the extent various irrationalities are found, they too are actually reasonably regular and predictable as well. Irrational isn't a synonym for random. (Moreover, there's a certain relativity to "irrational"; as tempting as it may be, irrational isn't a synonym for "disagrees with the given economic theorist" either....)
theThirdMan 15y ago
Irrationality can be seen as an externality, in that when it outweighs rational thinking, the economy suffers.
mixmax 15y ago
This is a huge problem in macroeconomics - and for many years the profession has just sort of looked the other way because they haven't had other good models. This is beginning to change with the advance of subfields such as behavioral economics where psychology is incorporated into the models. The field was advanced tremendously by people like Daniel Kahneman who won the Nobel prize in economics in 2002. The field of economics is being transformed, but as with all big changes it takes time. Kahnemans nobel prize lecture is worth watching if you want some insights into how people are irrational in predictable ways: http://www.nobelprize.org/nobel_prizes/economics/laureates/2002/kahneman-lecture.html http://www.nobelprize.org/nobel_prizes/economics/laureates/2...
- nerfhammer 15y ago
  I think you mean microeconomics
- Wilduck 15y ago
  While the assumption of rational actors is a problem in Macroeconomics, I wouldn't go so far as to sat that it's a huge problem. Almost certainly the larger problems of Macroeconomics are problems of endogeneity. Problems associated with assuming rational actors are relegated to the definition of Macroeconomic models. Very little work in economics is done by defining models, but rather by analyzing data in the context of these models. Problems of endogeneity [1] occur for many different reasons, but are present (to some extent) in nearly every empirical macroeconomic study. They arise whenever there is a circular dependency among the parameters you're trying to measure (economic growth is dependent on education is dependent on economic growth). While we do have statistical tools to help control for endogeneity biases, like instrumental variable regressions [2], we often don't have enough data points (we can only measure economic growth accurately for 100 some countries for 60 some years). All of this wouldn't be a problem if Macroeconomists could run controlled experiments, but this isn't really possible for fairly obvious reasons (Good luck convincing a country or three that they need to change how they run their country to validate some economic model). So sure, Macroeconomic models may be somewhat invalid because of assumptions of rational actors, but I'd argue that Macroeconomists have looked the other way, not because there wasn't anything better (as you've said, behavioral economics is making a lot of advances) but because there were larger issues that need to be addressed. The Microeconomists and game theorists can work out the rational actor problems. [1] http://en.wikipedia.org/wiki/Endogeneity_(economics) http://en.wikipedia.org/wiki/Endogeneity_(economics) [2] http://en.wikipedia.org/wiki/Instrumental_variable http://en.wikipedia.org/wiki/Instrumental_variable
nhaehnle 15y ago
Well, there's behavioral economics. That would remain by definition, since it is the study of how people actually behave, i.e. it does not start from the assumption of a rational actor. Another part that would remain is the purely descriptive, e.g. the study of how the monetary system actually works. Finally, it's not so much that the notion of a "rational actor" is entirely flawed, it's just that it's taken much too seriously.
Symmetry 15y ago
Assuming people are "rational actors" is a horrible idea when you're talking about individuals confronting a challenge once, but not a horrible one when you have communities of people who can all experiment and learn from each other's successes and failures. There's also the special case of, well, capitalists where the actors in a market are mostly those people who have demonstrated that they can act in what an economist would call a rational manner, or else they would have lost their money. A lot of economics is models built on this idea, but a lot is also empirical work looking at how people behave in aggregate in practice. Sometimes you get chances to test models built on rational actor models against reality and they do pretty well. For instance, theory says that if you outlaw speculation the price will swing around a lot more than in commodities that are speculated in. Luckily for lawmakers, the growers of onions managed to get together to lobby the government to ban speculation in onions. The law was passed, and now if you look at the cost of buying onions in bulk it swings around a lot more than other vegetables.[1] Sometimes speculators mess up and cause price swings themselves, but they tend to even out the swings caused by demand shocks more than they do that. I guess I'd say, in the end, to only worry about those theories that have been around long enough to be tested and which pretty much the entire economics profession agrees on.[1] Really, you ought to be doing that for any field of human inquiry where you aren't directly involved, since most new surprising findings turn out to wrong.[2] [1]http://money.cnn.com/2008/06/27/news/economy/The_onion_conundrum_Birger.fortune/ http://money.cnn.com/2008/06/27/news/economy/The_onion_conun... [2]http://gregmankiw.blogspot.com/2009/02/news-flash-economists-agree.html http://gregmankiw.blogspot.com/2009/02/news-flash-economists... [3]http://lesswrong.com/lw/ow/the_beauty_of_settled_science/ http://lesswrong.com/lw/ow/the_beauty_of_settled_science/ EDIT: Also, there's a lot of economics, even from way back when, that is predicated on people being irrational. Like, loss aversion[4] leads to sticky wages leads to the price level having real effects on the economy. [4]http://en.wikipedia.org/wiki/Loss_aversion http://en.wikipedia.org/wiki/Loss_aversion
tomjen3 15y ago
I am not so sure the notion is as dumbass as you believe. There are certainly those who act stupidly but, in general, people tend to act somewhat reasonable (if not they wouldn't be able to e.g drive since way to many people would be killed). So you don't have to entirely rational for economics to apply to you. But in any event studying economics has enabled me to understand and (correctly) estimate the likely course of future government laws. In some cases it enables me to be even more rational (fx currently the local government is going to make it much cheaper to buy fuel efficient cars. Since I was going to buy one anyway I won't buy one now since that will cost me more money. On the other hand I could have brought a non fuel efficient car and then sold it when prices went up).
- pohl 15y ago
  I rziaele taht olny the fsirt and last letrtes are riureqed to raed Esniglh, but the ohrtes are ruriqeed to notice the dncfeeirfe between dibuous and damsbus. They are not snoynyumos.
deleted 15y ago
[deleted]
wwwtyro 15y ago
The term 'rational actor' here does not mean "someone who performs actions that work always in their favor". It means "someone who performs actions that they think will achieve the ends they desire." Economic theory derived from this assumption takes into account that many people will be very wrong. It's a pretty sturdy assumption.
nandemo 15y ago
"Rational" is a loaded term but in the context of the Austrian school of economics, to which Hazzlitt subscribed, it's not such a big problem. The Austrians assume that man is rational in the sense that he acts purposefully. Joe chooses to exchange A for B because he believes that will be better for him. That is all. There's no assumption that B is in any way objectively better than A, or that Joe will be happy after the exchange.
- billswift 15y ago
  That is actually the way "rational agent" is used in much of philosophy and has been taken up by AI researchers - a rational agent is one that seeks to obtain its goals within the scope of its beliefs about the world.
RickHull 15y ago
> how much of its edifice is built upon the dubious notion of a "rational actor" This is not a tenet for the Austrian school of thought. In Human Action, Ludwig von Mises establishes that humans reveal their preferences through action. There are no hangups about whether these preferences are "rational" or free of mistakes.

by pohl 15y ago

ghaff 15y ago

Traditional economics, quite a bit--though most of the principles are still valid as a first approximation. But the various irrational ways in which people make decisions is the fundamental concept behind behavioral economics which has gained considerable attention over the past 20 years or so.

jerf 15y ago
I think one common error people make is to say "Oh, well, rational actors are wrong therefore I can throw rational actors out of the model entirely, everything goes, nobody knows anything, case closed." As you say, it's still a good first approximation, and to the extent various irrationalities are found, they too are actually reasonably regular and predictable as well. Irrational isn't a synonym for random. (Moreover, there's a certain relativity to "irrational"; as tempting as it may be, irrational isn't a synonym for "disagrees with the given economic theorist" either....)

theThirdMan 15y ago

Irrationality can be seen as an externality, in that when it outweighs rational thinking, the economy suffers.

mixmax 15y ago

This is a huge problem in macroeconomics - and for many years the profession has just sort of looked the other way because they haven't had other good models. This is beginning to change with the advance of subfields such as behavioral economics where psychology is incorporated into the models. The field was advanced tremendously by people like Daniel Kahneman who won the Nobel prize in economics in 2002. The field of economics is being transformed, but as with all big changes it takes time. Kahnemans nobel prize lecture is worth watching if you want some insights into how people are irrational in predictable ways: http://www.nobelprize.org/nobel_prizes/economics/laureates/2002/kahneman-lecture.html http://www.nobelprize.org/nobel_prizes/economics/laureates/2...

nerfhammer 15y ago
I think you mean microeconomics
Wilduck 15y ago
While the assumption of rational actors is a problem in Macroeconomics, I wouldn't go so far as to sat that it's a huge problem. Almost certainly the larger problems of Macroeconomics are problems of endogeneity. Problems associated with assuming rational actors are relegated to the definition of Macroeconomic models. Very little work in economics is done by defining models, but rather by analyzing data in the context of these models. Problems of endogeneity [1] occur for many different reasons, but are present (to some extent) in nearly every empirical macroeconomic study. They arise whenever there is a circular dependency among the parameters you're trying to measure (economic growth is dependent on education is dependent on economic growth). While we do have statistical tools to help control for endogeneity biases, like instrumental variable regressions [2], we often don't have enough data points (we can only measure economic growth accurately for 100 some countries for 60 some years). All of this wouldn't be a problem if Macroeconomists could run controlled experiments, but this isn't really possible for fairly obvious reasons (Good luck convincing a country or three that they need to change how they run their country to validate some economic model). So sure, Macroeconomic models may be somewhat invalid because of assumptions of rational actors, but I'd argue that Macroeconomists have looked the other way, not because there wasn't anything better (as you've said, behavioral economics is making a lot of advances) but because there were larger issues that need to be addressed. The Microeconomists and game theorists can work out the rational actor problems. [1] http://en.wikipedia.org/wiki/Endogeneity_(economics) http://en.wikipedia.org/wiki/Endogeneity_(economics) [2] http://en.wikipedia.org/wiki/Instrumental_variable http://en.wikipedia.org/wiki/Instrumental_variable

nhaehnle 15y ago

Well, there's behavioral economics. That would remain by definition, since it is the study of how people actually behave, i.e. it does not start from the assumption of a rational actor. Another part that would remain is the purely descriptive, e.g. the study of how the monetary system actually works. Finally, it's not so much that the notion of a "rational actor" is entirely flawed, it's just that it's taken much too seriously.

Symmetry 15y ago

Assuming people are "rational actors" is a horrible idea when you're talking about individuals confronting a challenge once, but not a horrible one when you have communities of people who can all experiment and learn from each other's successes and failures. There's also the special case of, well, capitalists where the actors in a market are mostly those people who have demonstrated that they can act in what an economist would call a rational manner, or else they would have lost their money. A lot of economics is models built on this idea, but a lot is also empirical work looking at how people behave in aggregate in practice. Sometimes you get chances to test models built on rational actor models against reality and they do pretty well. For instance, theory says that if you outlaw speculation the price will swing around a lot more than in commodities that are speculated in. Luckily for lawmakers, the growers of onions managed to get together to lobby the government to ban speculation in onions. The law was passed, and now if you look at the cost of buying onions in bulk it swings around a lot more than other vegetables.[1] Sometimes speculators mess up and cause price swings themselves, but they tend to even out the swings caused by demand shocks more than they do that. I guess I'd say, in the end, to only worry about those theories that have been around long enough to be tested and which pretty much the entire economics profession agrees on.[1] Really, you ought to be doing that for any field of human inquiry where you aren't directly involved, since most new surprising findings turn out to wrong.[2] [1]http://money.cnn.com/2008/06/27/news/economy/The_onion_conundrum_Birger.fortune/ http://money.cnn.com/2008/06/27/news/economy/The_onion_conun... [2]http://gregmankiw.blogspot.com/2009/02/news-flash-economists-agree.html http://gregmankiw.blogspot.com/2009/02/news-flash-economists... [3]http://lesswrong.com/lw/ow/the_beauty_of_settled_science/ http://lesswrong.com/lw/ow/the_beauty_of_settled_science/ EDIT: Also, there's a lot of economics, even from way back when, that is predicated on people being irrational. Like, loss aversion[4] leads to sticky wages leads to the price level having real effects on the economy. [4]http://en.wikipedia.org/wiki/Loss_aversion http://en.wikipedia.org/wiki/Loss_aversion

tomjen3 15y ago

I am not so sure the notion is as dumbass as you believe. There are certainly those who act stupidly but, in general, people tend to act somewhat reasonable (if not they wouldn't be able to e.g drive since way to many people would be killed). So you don't have to entirely rational for economics to apply to you. But in any event studying economics has enabled me to understand and (correctly) estimate the likely course of future government laws. In some cases it enables me to be even more rational (fx currently the local government is going to make it much cheaper to buy fuel efficient cars. Since I was going to buy one anyway I won't buy one now since that will cost me more money. On the other hand I could have brought a non fuel efficient car and then sold it when prices went up).

pohl 15y ago
I rziaele taht olny the fsirt and last letrtes are riureqed to raed Esniglh, but the ohrtes are ruriqeed to notice the dncfeeirfe between dibuous and damsbus. They are not snoynyumos.

deleted 15y ago

[deleted]

wwwtyro 15y ago

The term 'rational actor' here does not mean "someone who performs actions that work always in their favor". It means "someone who performs actions that they think will achieve the ends they desire." Economic theory derived from this assumption takes into account that many people will be very wrong. It's a pretty sturdy assumption.

nandemo 15y ago

"Rational" is a loaded term but in the context of the Austrian school of economics, to which Hazzlitt subscribed, it's not such a big problem. The Austrians assume that man is rational in the sense that he acts purposefully. Joe chooses to exchange A for B because he believes that will be better for him. That is all. There's no assumption that B is in any way objectively better than A, or that Joe will be happy after the exchange.

billswift 15y ago
That is actually the way "rational agent" is used in much of philosophy and has been taken up by AI researchers - a rational agent is one that seeks to obtain its goals within the scope of its beliefs about the world.

RickHull 15y ago

> how much of its edifice is built upon the dubious notion of a "rational actor" This is not a tenet for the Austrian school of thought. In Human Action, Ludwig von Mises establishes that humans reveal their preferences through action. There are no hangups about whether these preferences are "rational" or free of mistakes.