6 ms·

Unless You Are Spock, Irrelevant Things Matter in Economic Behavior

61 points by joshrotenberg 11y ago

baddox 11y ago
> Economists discount any factors that would not influence the thinking of a rational person. These things are supposedly irrelevant. I realize this is the setup for No True Scotsman, but are there any "serious" economists who actually believe the things this article criticizes? I hear these criticisms a lot, and I'm sure there are plenty of people who appeal to these simplifications to support a particular political belief, but from what I have read of modern economics (including some heterodox schools), economists don't operate under these assumptions. The criticisms get more bizarre throughout the article: > Economists create this problem with their insistence on studying mythical creatures often known as Homo economicus. ... An Econ would not expect a gift on the day of the year in which she happened to get married, or be born. That example doesn't even make sense in the context of the Homo economicus criticisms. A perfectly rational person who is aware of the custom of giving gifts for important anniversaries absolutely would expect a gift on those days. They'd probably give gifts as well. There's nothing irrational about that.
- dragonwriter 11y ago
  > Economists discount any factors that would not influence the thinking of a rational person. This is meaningless. Insofar as many models in economics are based on the rational choice model, the definition of a rational actor is one who acts to maximize their experienced utility with perfect knowledge of how their actions will affect their experience utility. Anything that will affect a persons happiness would affect the decisions of a rational actor. Now, its true that, even so, reality is known not to comply with the rational actor model, but this article misses most of them and attacks a giant strawman. And I wonder why, because as a professor of economics, the author has to know that, its not plausibly a mistake of ignorance.
  - baddox 11y ago
    To be fair, the author does say that modern economists don't claim to believe the simplistic Homo economicus model: > Of course, most economists know that the people with whom they interact do not resemble Econs. In fact, in private moments, economists are often happy to admit that most of the people they know are clueless about economic matters. But for decades, this realization did not affect the way most economists did their work. They had a justification: markets. To defenders of economics orthodoxy, markets are thought to have magic powers. But I think this criticism is invalid as well, based on what I have read of economics. It seems like few economists believe markets solve all societal problems, even among the notoriously pro-market schools, like Chicago and the very heterodox Austrian.
    - coldtea 11y ago
      >But I think this criticism is invalid as well, based on what I have read of economics. It seems like few economists believe markets solve all societal problems, even among the notoriously pro-market schools, like Chicago and the very heterodox Austrian. They might not think they solve "all societal problems" but they still think they solve too many of them. Plus, if you take away those crude models, most of the edifice of modern economics crumbles, and what's left is a dismal science that's no more scientific than astrology.
- coldtea 11y ago
  >I realize this is the setup for No True Scotsman, but are there any "serious" economists who actually believe the things this article criticizes? Believe them maybe not, and in their more theoritical papers and private company, they would admit not believing those. But the effective guidance they give to governments, and their arguments in policy issues, are all taken from crude models like those. And those are also the same models preached by economists to the general public, and which inform the way the people think about economics.
- wodenokoto 11y ago
  almost all economic theories are based on the rational model, although many have incorporated some ideas from behavioral economic. For example, the reason why many countries tax income in brackets, with increasing percentage is the realization that a dollar is not worth the same as a dollar. Which stated this way, seems quite irrational. But if you have $0 then $10 is probably a big deal. If you have $100,0000 it probably isn't. So the pain incurred by taking more if the top is smaller, then taking less of the bottom. Giving gifts is a destruction of value. Rarely can the gift giver buy a thing of same utility as the gift receiver could for the same money (given both are econs). Therefore the whole gift giving society is irrational.
  - sukilot 11y ago
    Forging social bonds is rational. Sentimental value makes gifts valuable -- if the recipient wants the gift. My mother doesn't want my cash, she wants my affection.
    - wodenokoto 11y ago
      Yes, of course. But that is not part of the rational model. The rational model is much, much simpler, which is why it is inadequate. Which is the whole point of the article. According to the rational model, the best you can ever hope to do is give your mother a gift of utility X, but most likely you will give her one of less than X. Your mother being rational can always choose to buy the thing with the most utility to her and therefore it is better to give her cash. All the other things you are adding are part of what is called behavioural economics. That doesn't mean they are irrational, or even not rational. But in economic theory, it is fairly new addition, and it is not incorporated throughout economic theory. But the nomenclature stays.
- bcoates 11y ago
  There's a tradition where behavior economists first come up with an esoteric model of rationality that would require people to do things that defeat their self interest, then perform experiments to see if subjects do them or not. This guarantees them publishable results: either you get "humans not rational!" or "rational behavior leads to bad result!" no matter what the subjects do. My experience is like yours: I've read a decent amount of economics stuff, and nothing that didn't have an axe to grind about the subject of rational actors itself ever proposes the kind of broken rationality models that the pop behavior economics stuff claims every economist believes.
bko 11y ago
The idea of "nudging" is growing in popularity in the popular culture. The idea is that the right government policy can nudge the individual to perform the obviously rational self-interested choice. The policies are innocuous enough that many reasonable people do not oppose them directly. Who thinks getting their fellow denizens to invest more of their savings or eat a little more healthfully is a bad idea? But when you think about it more, you can see some troubling trends of petty bureaucrats trying to control your life through nudging. The most offensive example that comes to mind is politicians in the UK trying to convince ISPs to (by default) block adult content because, you know, think of the children [0]. Of course you could call your ISP and remove the block so what's the concern, right? Be ready to give up ever more and more autonomy through slight manipulation all backed up by intellectuals tearing down Homo economicus straw-men. [0] http://en.wikipedia.org/wiki/Internet_censorship_in_the_United_Kingdom http://en.wikipedia.org/wiki/Internet_censorship_in_the_Unit...
- baddox 11y ago
  > The idea is that the right government policy can nudge the individual to perform the obviously rational self-interested choice. I would be concerned with any discussion of that idea that is unaccompanied by a discussion of public choice. Discussing the "right government policy" is interesting, but not very useful without also discussing whether we're more like to get the right government policy than the wrong one.
- ageek123 11y ago
  More generally, the entire field of "behavior economics" has a very strong paternalistic, authoritarian subcurrent to it. The message is: people can't be allowed to make decisions for themselves because they aren't capable of acting rationally or in their own self-interest. Of course the idea that the government is more likely to act in people's best interest than people themselves is laughable, yet is actually being advocated as a policy rationale.
  - Frondo 11y ago
    Right, because people seldom act rationally, and often act against their own self-interest. The message is an observation. As for the government acting in people's best interest, yes, exactly, that's what it's for. You are calling your state rep to discuss issues, right? If you're articulate, you can probably even book a 15-minute meeting to chat with them and tell them what's important to you, a citizen in their district. That's not as fun as posting hur-hur-gubmint-sucks on the internet, though, even though it's definitely more rational and self-interested.
analog31 11y ago
Playing devils advocate, maybe the students were being rational, but based their reaction on the information at their disposal. I taught college once, and observed that students make rational and sophisticated decisions based on what grades they expect to receive from their courses. They are also justifiably insecure about their math skills. They have to decide under time pressure whether this is a good teacher or a bad one, easy grader or hard, fair or unfair, etc. The students have to combine what they know about the mechanics of the grading scale, with their own internal information about whether they trust this guy -- especially if it's before the deadline for dropping the class. Introducing an unorthodox or weird grading scale could influence this judgment. The students may have a rational interest in nudging teachers towards a more favorable grading system. I have a couple of major misgivings about psycho-economics. First, any empirical failure of theory could be blamed on irrational behavior, when the theory itself is wrong for other reasons. We might just not be considering all of the information that people have at their disposal. Likewise, psychology could be blamed for any failure of economic policy, or of entire economies. Second, deciding who is capable of rational decision making, based on sex, race, or social class, has a long and sorry history. I'd rather let economics be the study of that which can be understood based on the behavior of rational actors, and put bigger error bars around the predictive ability of economic models.
eevilspock 11y ago
What if you are Eevil Spock?
stegosaurus 11y ago
The idea of a 'suboptimal' decision is a core tenet that keeps capitalism's wheels spinning. If you are poor, you must have just bought too many gifts, or refused to live in a house share with 5 other people, or took the bus instead of cycling to work, and so on. You didn't act entirely rationally, and so you 'deserve' to be poor. It seems hilarious when phrased in those terms but this sort of thing happens _all the time_. Especially because some people are capable, either by repression of emotion (stoicism) or by deference to authority (it's always been this way...) of jumping through these hoops. If we modeled the world in a reasonable way we'd discover how horrible it really is. The fact we don't is part of the cognitive dissonance that surrounds us. (Nudging has been mentioned lower down here - yet another example of a statistical calculation that completely overlooks individual plight, one that treats the populace as a flock to be herded...)

61 points by joshrotenberg 11y ago

> Economists discount any factors that would not influence the thinking of a rational person. These things are supposedly irrelevant. I realize this is the setup for No True Scotsman, but are there any "serious" economists who actually believe the things this article criticizes? I hear these criticisms a lot, and I'm sure there are plenty of people who appeal to these simplifications to support a particular political belief, but from what I have read of modern economics (including some heterodox schools), economists don't operate under these assumptions. The criticisms get more bizarre throughout the article: > Economists create this problem with their insistence on studying mythical creatures often known as Homo economicus. ... An Econ would not expect a gift on the day of the year in which she happened to get married, or be born. That example doesn't even make sense in the context of the Homo economicus criticisms. A perfectly rational person who is aware of the custom of giving gifts for important anniversaries absolutely would expect a gift on those days. They'd probably give gifts as well. There's nothing irrational about that.

dragonwriter 11y ago
> Economists discount any factors that would not influence the thinking of a rational person. This is meaningless. Insofar as many models in economics are based on the rational choice model, the definition of a rational actor is one who acts to maximize their experienced utility with perfect knowledge of how their actions will affect their experience utility. Anything that will affect a persons happiness would affect the decisions of a rational actor. Now, its true that, even so, reality is known not to comply with the rational actor model, but this article misses most of them and attacks a giant strawman. And I wonder why, because as a professor of economics, the author has to know that, its not plausibly a mistake of ignorance.
- baddox 11y ago
  To be fair, the author does say that modern economists don't claim to believe the simplistic Homo economicus model: > Of course, most economists know that the people with whom they interact do not resemble Econs. In fact, in private moments, economists are often happy to admit that most of the people they know are clueless about economic matters. But for decades, this realization did not affect the way most economists did their work. They had a justification: markets. To defenders of economics orthodoxy, markets are thought to have magic powers. But I think this criticism is invalid as well, based on what I have read of economics. It seems like few economists believe markets solve all societal problems, even among the notoriously pro-market schools, like Chicago and the very heterodox Austrian.
  - coldtea 11y ago
    >But I think this criticism is invalid as well, based on what I have read of economics. It seems like few economists believe markets solve all societal problems, even among the notoriously pro-market schools, like Chicago and the very heterodox Austrian. They might not think they solve "all societal problems" but they still think they solve too many of them. Plus, if you take away those crude models, most of the edifice of modern economics crumbles, and what's left is a dismal science that's no more scientific than astrology.
coldtea 11y ago
>I realize this is the setup for No True Scotsman, but are there any "serious" economists who actually believe the things this article criticizes? Believe them maybe not, and in their more theoritical papers and private company, they would admit not believing those. But the effective guidance they give to governments, and their arguments in policy issues, are all taken from crude models like those. And those are also the same models preached by economists to the general public, and which inform the way the people think about economics.
wodenokoto 11y ago
almost all economic theories are based on the rational model, although many have incorporated some ideas from behavioral economic. For example, the reason why many countries tax income in brackets, with increasing percentage is the realization that a dollar is not worth the same as a dollar. Which stated this way, seems quite irrational. But if you have $0 then $10 is probably a big deal. If you have $100,0000 it probably isn't. So the pain incurred by taking more if the top is smaller, then taking less of the bottom. Giving gifts is a destruction of value. Rarely can the gift giver buy a thing of same utility as the gift receiver could for the same money (given both are econs). Therefore the whole gift giving society is irrational.
- sukilot 11y ago
  Forging social bonds is rational. Sentimental value makes gifts valuable -- if the recipient wants the gift. My mother doesn't want my cash, she wants my affection.
  - wodenokoto 11y ago
    Yes, of course. But that is not part of the rational model. The rational model is much, much simpler, which is why it is inadequate. Which is the whole point of the article. According to the rational model, the best you can ever hope to do is give your mother a gift of utility X, but most likely you will give her one of less than X. Your mother being rational can always choose to buy the thing with the most utility to her and therefore it is better to give her cash. All the other things you are adding are part of what is called behavioural economics. That doesn't mean they are irrational, or even not rational. But in economic theory, it is fairly new addition, and it is not incorporated throughout economic theory. But the nomenclature stays.
bcoates 11y ago
There's a tradition where behavior economists first come up with an esoteric model of rationality that would require people to do things that defeat their self interest, then perform experiments to see if subjects do them or not. This guarantees them publishable results: either you get "humans not rational!" or "rational behavior leads to bad result!" no matter what the subjects do. My experience is like yours: I've read a decent amount of economics stuff, and nothing that didn't have an axe to grind about the subject of rational actors itself ever proposes the kind of broken rationality models that the pop behavior economics stuff claims every economist believes.

bko 11y ago

The idea of "nudging" is growing in popularity in the popular culture. The idea is that the right government policy can nudge the individual to perform the obviously rational self-interested choice. The policies are innocuous enough that many reasonable people do not oppose them directly. Who thinks getting their fellow denizens to invest more of their savings or eat a little more healthfully is a bad idea? But when you think about it more, you can see some troubling trends of petty bureaucrats trying to control your life through nudging. The most offensive example that comes to mind is politicians in the UK trying to convince ISPs to (by default) block adult content because, you know, think of the children [0]. Of course you could call your ISP and remove the block so what's the concern, right? Be ready to give up ever more and more autonomy through slight manipulation all backed up by intellectuals tearing down Homo economicus straw-men. [0] http://en.wikipedia.org/wiki/Internet_censorship_in_the_United_Kingdom http://en.wikipedia.org/wiki/Internet_censorship_in_the_Unit...

baddox 11y ago
> The idea is that the right government policy can nudge the individual to perform the obviously rational self-interested choice. I would be concerned with any discussion of that idea that is unaccompanied by a discussion of public choice. Discussing the "right government policy" is interesting, but not very useful without also discussing whether we're more like to get the right government policy than the wrong one.
ageek123 11y ago
More generally, the entire field of "behavior economics" has a very strong paternalistic, authoritarian subcurrent to it. The message is: people can't be allowed to make decisions for themselves because they aren't capable of acting rationally or in their own self-interest. Of course the idea that the government is more likely to act in people's best interest than people themselves is laughable, yet is actually being advocated as a policy rationale.
- Frondo 11y ago
  Right, because people seldom act rationally, and often act against their own self-interest. The message is an observation. As for the government acting in people's best interest, yes, exactly, that's what it's for. You are calling your state rep to discuss issues, right? If you're articulate, you can probably even book a 15-minute meeting to chat with them and tell them what's important to you, a citizen in their district. That's not as fun as posting hur-hur-gubmint-sucks on the internet, though, even though it's definitely more rational and self-interested.

analog31 11y ago

Playing devils advocate, maybe the students were being rational, but based their reaction on the information at their disposal. I taught college once, and observed that students make rational and sophisticated decisions based on what grades they expect to receive from their courses. They are also justifiably insecure about their math skills. They have to decide under time pressure whether this is a good teacher or a bad one, easy grader or hard, fair or unfair, etc. The students have to combine what they know about the mechanics of the grading scale, with their own internal information about whether they trust this guy -- especially if it's before the deadline for dropping the class. Introducing an unorthodox or weird grading scale could influence this judgment. The students may have a rational interest in nudging teachers towards a more favorable grading system. I have a couple of major misgivings about psycho-economics. First, any empirical failure of theory could be blamed on irrational behavior, when the theory itself is wrong for other reasons. We might just not be considering all of the information that people have at their disposal. Likewise, psychology could be blamed for any failure of economic policy, or of entire economies. Second, deciding who is capable of rational decision making, based on sex, race, or social class, has a long and sorry history. I'd rather let economics be the study of that which can be understood based on the behavior of rational actors, and put bigger error bars around the predictive ability of economic models.

eevilspock 11y ago

What if you are Eevil Spock?

stegosaurus 11y ago

The idea of a 'suboptimal' decision is a core tenet that keeps capitalism's wheels spinning. If you are poor, you must have just bought too many gifts, or refused to live in a house share with 5 other people, or took the bus instead of cycling to work, and so on. You didn't act entirely rationally, and so you 'deserve' to be poor. It seems hilarious when phrased in those terms but this sort of thing happens _all the time_. Especially because some people are capable, either by repression of emotion (stoicism) or by deference to authority (it's always been this way...) of jumping through these hoops. If we modeled the world in a reasonable way we'd discover how horrible it really is. The fact we don't is part of the cognitive dissonance that surrounds us. (Nudging has been mentioned lower down here - yet another example of a statistical calculation that completely overlooks individual plight, one that treats the populace as a flock to be herded...)