Lambert here: One wearies of repeating this, but the Sveriges riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne” is not a “Nobel Prize,” but a marketing scheme devised by neoliberal central bankers to hijack the Nobel brand; see Yasha Levine for the sordid history.
That said, “libertarian paternalism” sounds suspiciously like feudalism, although I suppose it’s better to have the rent collected by a professional in a suit nudging (and I suppose, winking) rather than by a guy on a horse in a tin suit who whacks you with a sword. So civilization progresses. And now to the aptronymic Richard Thaler…
By Konstantinos Efstathiou, a Greek citizen, who works in Bruegel as an Affiliate Fellow in the Macroeconomics and Governance area. Before joining Bruegel, Konstantinos was at the European Commission, as a Blue Book Trainee in the Cabinet of President Juncker. He also interned at the Central Bank of Luxembourg (BCL) as a research assistant, involved in projects related to the Wage Dynamics Network (WDN) research group. Originally published at Bruegel.
Richard Thaler was awarded this year’s Nobel Prize in Economics for his contributions to the field of behavioural economics. His work documents a set of cognitive biases affecting economic decision-making and casts doubt on commonly-held assumptions about the rational ‘homo economicus’ that inhabits economic models and theories. What are the implications for the economics discipline and public policy?
Martin Sandbu in the FT lists some of Thaler’s seminal contributions to behavioural economics, which reveal people’s bounded rationality, willpower and self-interest. Firstly, Thaler discovered the endowment effect, whereby an individual’s willingness to pay for a given object only a fraction of what they are willing to part with it. Secondly, his demonstration that people have a bias for consumption today, leading them to take less care of their future than they intend to. Finally, his popularisation of experiments that showed people have a strong preference for fairness, such as the “dictator” and “ultimatum” games. Sandbu notes that although Thaler developed topics many other contemporary economists have touched upon, he is unique in the influence his work has had on policymaking and the economics profession. Specifically, Thaler contributed to a new approach in public policy called “nudging” or “libertarian paternalism”, which exploits people’s behavioural biases and irrationalities rather than using coercion in order to make them behave in ways seen as more desirable than policymakers.
On a similar note, Paul Krugman writes that Thaler did not just document deviations from rationality but also showed that there are consistent, usable patterns in those deviations. For Krugman, however, the key question is what this realization should imply for the practice of economics. What needs to change? Between those who argue that imperfect rationality changes everything and those suggesting that the assumption of rationality is still the best game out there, Krugman asserts that the answer depends on the field. He finds the concept of rationality as used in finance, though imperfect in detail, beneficial and correct in its broad implications. The assumption that rational investors will build all available information into asset prices is consistent with the observed unpredictable movement of those prices – which creates patterns that are subtle, unstable, and hard to make money from. In macroeconomics, however, Krugman argues that the assumption of rationality has been both very influential and hugely destructive. Wage- and price-setting do not reflect the agents’ best available information about future monetary policies; if it did, we’d be seeing wage contracts moving rapidly. Krugman posits that in financial markets, smart investors can, within limits, arbitrage against the irrationality of others but no equivalent exists in labour and goods markets or consumer behaviour.
Roger Farmer, an advocate of including beliefs as an economic fundamental in macroeconomic models, argues that this year’s Nobel Prize will spread awareness of how important the connection between economics and psychology is. He draws a distinction between the broad and the narrow definition of rationality. Broad rationality is essentially a tautology: rational individuals always choose their preferred action. It is the narrow definition of rationality, a set of axioms that was introduced by John Von Neumann and Oscar Morgenstern, which has been shown to be violated in experimental situations. According to Farmer, those axioms make a great deal of sense when applied to choice over monetary outcomes, but they have less power when applied to complex decisions which involve sequential choices and payoffs from different commodities at different points in time.
Kevin Bryan at “A Fine Theorem” agrees that Thaler’s work is brilliant, but views it also as potentially dangerous to young economists. Bryan’s scepticism has several aspects but his central argument is that repeated experience, market selection, and other aggregative factors mean that irrationality may not matter much for the economy at large. In general, experts in a field and markets with all the tricks they develop, are very good at ferreting out irrationality. This is because many economic situations involve players doing things repeatedly with feedback. This means that heuristics approximated by rationality evolve over time, or players who “perform poorly” are selected out of the game.
As a result, Bryan argues, situations such as saving through defined contribution pension plans are the exception than the rule: this is a decision with limited short-run feedback, taken by unsophisticated agents who will learn little even with experience. Here Bryan is referring to the “Save More Tomorrow” (SMarT) programme for defined contribution pension plans proposed by Thaler, in which employees commit upon joining to increase their contribution with every future rise in their pay but can also opt out of the plan at any time. The SMarT plan, which has been successful in increasing pension savings, is an example of “nudging” that specifically addresses self-control biases. Bryan also cites the mounting importance of robo-advisors, index funds, and personal banking in managing saving decisions as another reason why irrationality in the lab may not translate into irrationality in the market.
Noah Smith directly replies to Bryan’s criticisms and dismisses them as inadequate. Against Bryan’s main argument about the “the invisible hand wave” (Thaler’s own term for the assumption that markets have emergent properties that make individual not-quite-rational agents behave like a group of complete-rational agents), Smith argues that the justifications given for it are typically vague and unsupported. A few perfectly rational individuals do not actually compete all the other less rational agents out of the market. He also remarks that people typically pay financial advisers a fifth of their life’s savings or more. If the market for financial advice is an efficient market where individuals pay to counter their behavioural biases, then these behavioural biases are as severe as suggested by the high price that individuals are ready to pay. Smith also challenges Bryan’s assumption that someone with nontrivial behavioural biases can be completely rational in her choice of an adviser.
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So, people do crazy sh..t when they are investing because of fear? Brilliant! Thanks. Give that ‘researcher’ a million. Wait make it a billion…
Of course he did forget to mention it is much easier when you have inside info, ala Uncle Warren B via Goldman Sachs. Some are always more equal than others.
So, people do crazy sh..t
Full Stop
“Thaler discovered the endowment effect, whereby an individual’s willingness to pay for a given object only a fraction of what they are willing to part with it.”
Yeah he sure discovered that alright. No one, I mean no one, saw that human beings are in for themselves.
“Secondly, his demonstration that people have a bias for consumption today, leading them to take less care of their future than they intend to”
No, see products are designed to fail. Your car is designed to fail. Your washing machine is designed to fail. Your clothes are designed to fail. When you live in a world that offers constant consumption vs. stagnation, you choose constant consumption, and the choice is along economic means (what can I afford today?). What a grand turd of a statement. It’s a complete Freudism, the type of “oh you dreamed of a banana? You must want to have sex with your father”.
Im sorry, but this is what passes for an economist these days? No math, no real studies, no real experiments, just throw a little psychology and boom, you’re a behavioral economist.
We always scoffed at these sorts in the engineering departments. Laughed at their experiments with teensy eensy sample sizes that somehow lead to ‘grand revelations’ about how EVERYONE in the world acts and thinks.
Mathematical psychologists have always laughed at these so-called behavioural economists.
Awfully designed studies, no proper modelling of individual uncertainty /errors just for starters.
It is why they have successfully used a theory that is 90 years old.
…laughing all way to bank (people appear having missed): https://www.youtube.com/watch?v=A25EUhZGBws
Yes, I’d heard Thaler in an interview several years back, and considered him to be either an idiot or another pseudo-econ misinformationist.
Reminds me of all those clowns one used to hear being interviewed in the immediate aftermath of the global economic meltdown, and the informed listener would wonder at the identity of those morons, then it would be announced at the end that they were former governors of the Federal Reserve System.
(And thanks for reminding us of the nonexistence of any Nobel Prize in Economics.)
I’d add heterodox economist Lars P. Sylls comments on this (he has a few other posts on Thaler that are also worth reading).
concluding:
I think the difference between the behaviorilists and the mainstream, especially Austrian/Chicago economists is that the behaviorilists know that it will be really difficult to find rules that will work. So they kind of marvel when they find a reproducible trend instead of assuming that the economy will follow rules similar to Newtonian physics.
Ultimately, they are proving that the world is not filled with little econs who will complete Adam Smith’s invisible hand and so regulation and nudging actually have critical roles to play. This is anathema to the free market crowd who believe that the best natural order of things is something like the 1800s when robber barons could roam the earth.
The inherent inability to get all of these competing thoughts to occupy ones head is playing out today in the Obamacare repeal debacle where it is not even possible to have a coherent discussion.
Well said!
With respect, Swait & Louviere (1993) were the first of many to show that lab research (“stated preferences”) – if collected appropriately – are consistent with real world preferences (“revealed preferences”). The differences are largely due to the choice consistency – people are often less sure in the real world (though the opposite can be true) – which in a limited dependent variable model (buy this over that etc) leads to BIAS not just problems with standard errors. Much of the comparisons made supposedly finding differences failed to acknowledge the importance of this factor (discovered in the 1980s but still apparently unknown to pollsters and many marketers and practically all economists) leading to all sorts of nonsense research and “fixes”.
Of course the stated preference study MUST be done carefully, not adding silly utility functions to “fit” economic theory and properly understanding where “uncertainty” arises. But if you do it well, you predict well and as you know from our previous discussion, can beat the pollsters and bookies on a general election prediction!
People like Thaler and Kahneman went down blind alleys. Kahneman’s only good work is his recent fast and slow decision-making stuff. It is testable by models that show physiological links between brain activity and stated preferences. Not quite “validation” perhaps, but a big step forward.
PS the gossip in the math psych community is that Kahneman only got the “nobel” because Tversky died early!
#Concur
Lars also posted this, which includes a pretty good video of Thaler presenting on behavioral economics.
Given that human behavior is unpredictable, and that the lure of Platonic rationality is a scam … this is an improvement compared to conventional economics. But a truly empirical economics, would be very close to pure description, without any prescription at all. The next step will be to deconstruct GDP as a false measure of what is empirically going on. Finance shouldn’t be counted toward GDP.
Isaac Asimov had this all figured out a 60 years ago with his psychohistory series. https://en.wikipedia.org/wiki/Foundation_series
So we just need a Nobel Prize winner to turn out to be Hari Seldon, have some telepaths to back things up, and we are good.
The fact that we have substantial recognition of economists who espouse the irrationality of decision makers (i.e. all humans) is, I think, a great improvement over the blind claims of perfect rationality we have lived with through much of modern time. Between Thaler, Kahneman and others, the smooth, sheer wall of the assumption of rationality (particularly in markets) is irreparably cracked. I am happy to see recognition given to this line of thought.
Of course, these researchers (and, I think, Thaler in particular) are part of an early, just-barely-seen-the-light group and should be treated as such. Thaler is still a huge believer in markets without real regulation (from what I can tell from his writing – particularly in his & Sunstein’s book Nudge) and seems to believe that this “liberal paternalism” can solve all problems with them. There are some good thoughts wrapped up in that concept, but I certainly don’t think LP is enough to make markets work for everyone. However, if a “Nobel” prize will lend legitimacy to his basic premises and get more economists, young and old, to embrace his work, I can only see benefit for us in the years ahead.
With Massey, Thaler wrote an interesting paper on the NFL draft.
Particularly interesting is on pages 13 and 14, where they use the data to obtain a discount rate (how much is next year’s pick worth relative to this year). The discount rate is over 170%–demonstrating spectacularly short-term thinking among the management.
Also, from the conclusion: “In our judgment, there is little reason to think that the market for CEOs is more efficient than the market for football players.”
Its why Belichick has done so well over the past 20 years. He is one of the few that doesn’t prize the top dozen draft picks, going for quantity instead because he recognizes that it is difficult to accurately assess the talent and would prefer more opportunities to fail rather than fewer. He only has so many slots to fill and increasing the number of people being perused to fill those slots increases the odds that he will find someone.
-would prefer more opportunities to fail rather than fewer-
This is the gist of Scott Adams’ life outlook in his book “How to Fail at Almost Everything and Still Win Big”. Focus on a system, rather than a goal. Stop throwing good money after bad, rather than draft the best QB.
Arguably (and obvious;y Clinton fans will disagree) Trump’s constant turnover of his campaign staff was a strength, not weakness/feature, not a bug. ymmv.
I went To Ryan Leaf’s 1st game, in which his team was triumphant against my hapless Bills, and then it was all downhill from thereon…
In the draft a year prior, there was much gnashing of teeth over who was the better QB to be drafted, him or some guy named Peyton Manning?
Potential is a Latin word that means you haven’t done a damned thing yet~
I found this interesting
https://ftalphaville.ft.com/2017/10/09/2194613/thaler-the-cuba-fund-and-the-emerging-markets-hypothesis-plus-a-roundup/
I studied behavioral economics in grad school, but we called it sociology.
also philosophy…
and literature, e.g. Flaubert (‘Madame Bovary c’est moi’)
Any day that economists realize that humans are more complex that little utility maximizing animals, and yet what have they done with that simple insight? Created ‘the nudge’ which frightens me even more. How easy it is to ‘nudge’ someone into a rotten 401(k) or a lousy health care plan, and who exactly is to design these nudges, and to benefit whom? Ahh, but this comment section is far to cynical/insightful to ever be fooled into a bad nudge, yeah?
The rediscovery of human complexity should send everyone back to political science & questions about who designs the nudges, how they are designed, etc, and to philosophy where we ask what we should be nudged toward. “Tell me Socrates, does the nudge exist to make the city better, or to make each man (aner) better” or “Tell me Socrates, do great men (aner) nudge the many for the benefit of themselves or for the many (anthropos)”
Seriously, if this comment section designed a nudge, who would be nudged, in what direction, for what purpose, for the benefit of whom. Better, imagine those teenage anarchists over at zerohedge could design a nudge, how different would that be?
If people are paying one fifth or more of their lifetime savings to financial advisors, then that nudge must be from a gun. That type of sharing represents another type of public-private partnership, where the public funds private wealth. One bright historical note is that GWB did not push through his social security savings self selection, another snake in the grass killed.
Financial advisors are NOT your friends. They never have been.
Remember that book, Where are the Customers’ Yachts? The owners of the yachts were financial advisors.
. . . people are paying one fifth or more of their lifetime savings to financial advisors, then that nudge must be from a gun. . .
Bernie Sanders: The business of Wall Street is fraud and greed.
Look at all the commercials nudging peasants to “save moar” and hand the money over to the fraudsters. The fatuous professor gets his pension through the massive debt kiddies take on to be “educated”. He need not save a dime.
The challenge of economics is that it is deterministic random not algorithmic. Behavioral responses are merely one of many deterministic influences which drive error into their algorithm base theories. The problem with this is akin to the 3-body problem in physics, mathematically determined but impossible to predict random outcomes over time.
Yet central bankers are obliged to promote the illusion of control, when in fact they haven’t a clue.
In the past decade, “QE herding” among central planners has created a global bubble of gobsmacking proportions.
This bizarre incident in human history reflects many cognitive biases, including the bias for consumption today which unfortunately is incentivized by democracy.
Bubble III surely will merit its own chapter in Extraordinary Popular Delusions and the Madness of Crowds.
A great companion book to the one you mentioned is “The Crowd-A Study Of The Popular Mind”, by Gustave Le Bon.
Highly recommended, and quite appropriate for this thread on how we behave when influenced by everybody doing the same thing.
https://en.wikipedia.org/wiki/The_Crowd:_A_Study_of_the_Popular_Mind
Supply side economics and Bernays is a result of democracy Jim – ????? – not to mention AET/Chicago, Rubinomics, divergence of wages to productivity, forced deferred income into 401ks for fee stripping, RE becoming a Veblen good, offshoring, FIRE sector take over of the main street economy, thinktankistan ring fencing D.C, et al, its a short list…. but yeah democracy….
disheveled…. Wow Jim… blame on those with the least amount of agency…
Probably worse even than that. IMO economics is not determinist random nor even undeterminist random with a defined probability distribution (known unknown) but, since it attempts to predict/control future events, is dealing with inherent uncertainty – those famous unknown unknowns.
Secondly AFAICT economics, even those famous behavioural experiments, always makes the assumption that “price” and “value” are the same.
Value (to an individual) != Price (set by market aggregation) => OMG irrationality, fire up the Nudge Engines.
with respect, that’s only partly true. “Traditional” (welfarism) does indeed assume this. But the schism in the 1970s that produced extra-welfarism (or non-welfarism) used in health in the non-US English speaking world to value health explicitly rejects this. It remains an open sore in health economics to this day.
JustAnObserver, it’s even worse than that, because a large fraction of economic “data” isn’t even right.
So in addition to those famous unknown unknowns, there are also the “unknown knowns” – the things you think you know, that just ain’t so. Such as how much the high speed algorithm will haircut you when you place a “market” order in a thinly traded market and get an execution a long ways from the most recently quoted bid/offer. Or the economics of “we have to pass this bill to find out what’s in it” (and no, you can’t keep your plan, or your doctor, or even your money…) Obamacare…
P.S. The unknown knowns was of course was the category that the SecDef overlooked entirely. And there weren’t any WMDs in Iraq, were there? An unknown “known” that someone should have spotted.
Lordy, I miss Douglas Adams. He was WAAYY ahead of behavioral economics. The Earth was a computer model, and the mice were cleverly putting the human beings through their paces. That makes a lot more sense than these navel gazer economists…
I believe the correct scientific evolutionary path was from Thorstein Veblen to Doug Adams — both fantastic guys!
Nudge economics–is it related to fraud?
I certainly don’t see it that way. For sure, fraud can be perpetrated via nudges (economic or otherwise) but they are not intrinsically linked. Indeed, fraud seems to be alive and well in many spheres where we don’t employ much of the nudge mentality at all
I believe in engineering systems to fail well – because they are all likely to fail in many ways, big and small. Nudge theory, when used without cynicism*, malfeasance or negligence, is a tool to help us make systems that fail better than they do now. The understanding of the irrationality of the _reasons_ behind many of or decisions (which is distinct from the rationality of the decisions themselves) can help us design these better-failing systems, whether through nudges or other, more intrusive means.
*OK, maybe a _little_ cynicism might be a good thing here…
Oh my, so the Economics Dept has walked across campus and discovered that there is a Marketing Dept?
And, horror of horrors, they discovered that it’s in the grubby world of commerce that’s promoted by the …
… business school!
That would have been the reaction at my alma mater. Where the econ department was firmly planted in the liberal arts college. And still is.
Hehe true. The smart ones recognised which bits of academic marketing were two decades ahead of them and used those (ignoring the bits that were just silly modelling for the sake of modelling/publication).
The even smarter ones then realised they had to go to the math psych department, learn how to conduct proper experiments and get the basics of the underlying theory the cleverer marketers were using.
The ultra smart ones then exited, made a mint at companies who understood how to find out what their customers wanted, what tradeoffs they were prepared to make etc.
…perhaps the real “smart ones” were those racing sailboat – crew, with Saloman Bros. banksters, listening, as they decompressed:
https://www.youtube.com/watch?v=AlO9kO5GWbk
Of course there are deviations, fashion is a very clear example, as is advertising, and group behaviouur (Oooh! I want one of those!!).
I’d suggest the economists, who seem to be mostly male, go shopping with their wives frequents, where the guiding system is probably opportunistic acquisition (aka: Gathering).
I suspect the male view of “rational behavior” is not the same as the female view of “rational behavior,” as the consequence of females spending two third of consumer GDP is probably irrational to male economists.
As one lady once said to me: “It may be that women do not want to be understood by men.” A very profound statement, with many levels of meaning.
To sum up: My wife says “You can’t wear that!” and my response is, “I’m not naked nor am I uncomfortable.” Then I go and change.
My father was the quintessential absent-minded professor. He was notorious for wearing mismatched socks to work. When it was pointed out to him, Dad’s response was, “I have another pair exactly like this one at home.”
Women like shoes.
Thurstone in 1927 threw this out in developing random utility theory – which in part is why McFadden won the 2000 “nobel” – he actually PREDICTED something (the demand for the BART in SF) before a rail was laid.
McFadden is one of only a very few worthy winners of that “nobel”.
Today we have two mutually exclusive ideas that are accepted and no one points out the contradiction:
1) People are irrational and driven by deep seated primitive desires
2) People are rational
Advertising gave up on appealing to rational consumers sometime in the 1950s.
It found it much more effective to appeal to the deep seated primitive desires of consumers to boost sales.
Modern economics has carried on with the assumption that people are rational, though any housing market in the world would seem to disprove this assumption. Even the Tulip Mania (Part 2) of the dot.com boom and bust could not sway economists from their assumption.
Economists are just starting to take on board what the advertising industry has been working with since the 1950s, people are irrational.
Advertising has never looked back.
“Subliminal Seduction” was used university level to define advertising:
https://www.amazon.com/Subliminal-Seduction-Wilson-Bryan-Key/dp/0451061489
(cost $1.95 at that time)
“By the mere fact that he forms part of an organised crowd, a man descends several rungs in the ladder of civilization. Isolated, he may be a cultivated individual; in a crowd, he is a barbarian — that is, a creature acting by instinct. He possesses the spontaneity, the violence, the ferocity, and also the enthusiasm and heroism of primitive beings, whom he further tends to resemble by the facility with which he allows himself to be impressed by words and images — which would be entirely without action on each of the isolated individuals composing the crowd — and to be induced to commit acts contrary to his most obvious interests and his best-known habits. An individual in a crowd is a grain of sand amid other grains of sand, which the wind stirs up at will.”~
Gustave Le Bon
Lars P Sylls (mentioned by PlutoniumKun) does often make very good points – a key one is whether economic relationships are ergodic (stable/amenable to future predictions). I wouldn’t disagree that much of macroeconomics is non-ergodic. But you have to be careful not to push this criticism too far. Various applications in micro-economics have been phenomenally successful (see my comment re McFadden above) due to good predictive models. (You have to read the transport, environmental and health economics literature to learn this and so-called proper economists wouldn’t be seen dead with those guys.)
Of course, discrete choice models are a dangerous tool – anyone using them on mobile (cell) phones around the time of the first iphone would probably have gone wrong because it is such an “experiencial good” and people haven’t formed stable preferences (demand). But if used sensibly they’ve proved their worth time and time again, merely by using two assumptions (Random Utility Theory – Thurstone 1927):
(1) People, when choosing between A and B, choose the one they prefer most, BUT
(2) People are uncertain/make mistakes/be genuinely indifferent.
You can construct much better, data consistent models when you use just these two assumptions without all the guff economists try to add. To return to the earlier point though, caveat emptor. Think of whether the application you are interested in is amenable to this kind of model. If it is, you have a powerful model – it is a model of the INDIVIDUAL – and to the extent that some individuals are similar you can aggregate them. No representative agent nonsense. Get the empirical distribution of people and see what it looks like….and I’ve seen some doozies!
Maybe I’m missing something here, but it seems to me a concerted effort is underway to ascribe the failure of monetary policy to generate growth in the real economy and secular stagnation to the irrational behavior of “We the People” rather than the failure of the current group of neoliberal economists to prescribe economic policies that actually work for the majority of people, rather than a very narrow segment of the population. Neat transfer of responsibility for policy failure that would be mildly amusing as another example of human behavior if it all wasn’t so damaging.
What about federal fiscal policies and the desirability of sectoral federal spending deficits?… I recommend the current group of “Nobel Prize in Economics” and professional gatekeepers be tossed out and respectfully nominate Warren Mosler, Bill Mitchell, Stephanie Kelton and L. Randall Wray for the next “Nobel Prize” in economics.
Sunday New York Times featured multi-page scapegoating of “new technology” (Amazon, Apple, Google, Facebook) for destruction of U.S. economy…yet another scapegoating attempt to divert from Wall Street bankster “control accounting frauds”…
(follow the $$$$)
If you were to only look at the box scores of baseball games over the past 30 years, there’d be no indicator whatsoever that massive fraud via steroids was going on, it’s similar when all you digest in economics is numbers and turn them into box scores with squiggly graphs going akimbo.
Behavioral economists are, generally speaking, on the right track. At least empirical, and perhaps maybe one day it will make economics falsifiable. (Although after reading this post over at Evonomics I will never think the same about “biases” again..)
But how well does it translate to the rest of the world? Because most studies of behavioral economists depend on data gathered from WEIRD people: Western, Educated, Industrialized, Rich, and Democratic,
I can see that policies based on the ‘predictions’ of behavioral economics will once again be to the detriment of poor countries.
That’s an interesting quote, in that it suggests that Thaler got the ‘Nobel’ not because his ideas were new (they weren’t) but because he managed to get the economics profession to actually pay attention to them. Knowing what we know about economists, I think we can understand why that might be a notable achievement, but I always thought economists liked to think of their profession as a rigorous intellectual discipline in which ideas stand or fall on their own merit. I’m surprised to see such a candid admission from one of them.
…meanwhile, Laffer-Wanisky-“Supply-Side” lies apply yet again…(cutting taxes creates jobs)
should read… “faux Nobel Prize”. No surprise that faux science wins faux prize.
Every mainstream economist I have read asserts that the field assumes that markets are rational systems, and economic behavior is motivated by greed.
So whyizit that the field is so slow to notice (as in 2007) that greed is irrational? Thus, the motivational basis for markets cannot be rational. Dan Kahneman pointed that out while I was still in grad school. I guess this is yet another attempt by Nobel to nudge Economics into making friends with Psychology.
Anybody but me notice a big psychological bubble on WS?
There’s the key point. Mainstream economics cannot drop these…they’re just too attached to them and when they encounter a problem they just introduce a tweak to their model so they can still get published in AER or whatever. But they cannot/won’t see that these are fundamental weaknesses. 95% of macro should be abolished (probably just keep MMT and some other heterodox stuff). All of theoretical micro should be abolished. But then economics (certainly micro) becomes what it should be – really something akin to engineering, where some key theoretical principles (which I recount above and have survived 90 years of testing) are used in careful ways that add in context specific factors depending on the sub-discipline (transport/environmental/health economics) to solve specific problems.
PlutoniumKun made some points above that I didn’t adequately address in my reply – issues to do with internal vs external validity. Well I know well the conceptual point he’s making (having come from health economics and medical statistics) and a lot of the time it’s true. But in choice modelling you actually – provided you have liaised with design statisticians – eliminate confounding by design, or (even better) quantify the effects of it. You essentially learn the answers to a huge number of “what if…?” scenarios, and if you have thought adequately about the real world to which you are trying to generalise, your design will tell you the effects of what various “human/other factors” in the real world do to your results.
The key is recognising when there’s too much stuff you don’t know, knowing your limitations, which of course all too few economists can do. And even then, research frontier issues include getting a better handle on things like personality types, motivations and attitudes – the model can be used to classify these as well and this can help when traditional prediction of demand is just too difficult – this links in with the point made above about how advertisers moved away from the latter to the former.
Economics is no more deserving of a “nobel” than engineering (with no criticism implied of engineers, they do crucial jobs). They should recognise their role to addressing particular applied issues in the areas mentioned, using some basic principles (which did NOT come from economics are NOT those for which psychologists have won the “nobel”) but adding on context specific factors where relevant. But then economics ceases to be “sexy” as a subject…..probably a good thing for society.