What’s your opinion on behavioral economics?
What is it?
the pollution of economics by psychology/behavioural science
What’s your opinion on behavioral economics?
It’s interesting stuff, I’m not particularly well read on it though, it’s an area I’d like to read more about. That said, it seems to block a lot of the useless criticism that is launched against mainstream econ.
Behavior economics seems pretty unimportant relative to other subdisciplines within economics. I’ve never been impressed by or even particularly interested in anything I read about it. What the New York Times makes it sound like and what it actually is seem very different.
Behavioral economics is interesting stuff - particularly Schiller’s Irrational Exuberance and some of the studies on investor psychology David Dremen refers to in Contrarian Investment Strategies for the Next Generation. It’s pretty necessary to know the stuff to understand the psychology of bubbles - but where it seems to go wrong is in suggesting that bubbles themselves are caused by that same psychology.
It’s expansion of the money supply that causes all of the symptoms of the bubble, including what could be called irrational exuberance (they may be rational in the Misean sense, but not in the normal sense of the word, especially when you read things like The Housing Bubble Blog for years and see all of the crazy things people believed at the peak of the bubble)
I do think some of the things Schiller says can help provide some evidence that there is an ongoing bubble, but it’s just a symptom of a larger cause.
That’s my impression. I’ve been having an argument (bottom of http://www.librarything.com/topic/96862) with a guy who keeps spouting about this stuff. I’m planning to read a book he recommended, but I already know what I’m going to find…
Isn’t “behavioral economics” redundant?
Clayton -
I didn’t make that statement strong enough - many economists and a lot of the opinion makers of society are pushing for behavioral economics to become the standard explanation for bubbles - most people believe it is already (if you ask people what causes bubbles, they’ll give you some answer along the lines of “people going crazy”.
So really, support for behavioral economics is usually a means to obfuscate the real causes of bubbles, easy money.
A lot of crank economic theories use as their starting point the true observation that orthodox economics restricts itself to the subset of human behavior that is voluntary in nature, what Mises (others?) called “catallactics”. Of course, much of human behavior is not voluntary and all of human behavior is influenced by the ever-present threat of force (even in a natural order), so that, economics can be said to purposely ignore a very large and important part of human behavior for the purposes of constructing an intelligible theory of those aspects of human behavior that fall within its purview.
Clayton -
No. It simply isn’t economics. It’s plain psychology.
How much of this is useful for economic theory, and not merely for business/economic forecasting/strategizing etc?
On the other hand, I think it is maybe only austrians that see those two things as distinctly separate?
From an austrian point of view it is, since austrian economics studies human action, or in other words human behavior.
I have to admit I dont believe in praexology and the axiom aproach, so for me austrian economics has always been a sociological/psicological study of humans applied to economics. So I see austrian economics already as “behavioral economics”. The danger of behavioral economics is that you can manipulate a lot in the social science and arrive to fascist conclusions. And people will be compelled to accept it because of the scientific justification. Its dangerous.
To claim that behavioral economics is psychology and hence must be purged from “pure” economics is to say that all interdisciplinary research can only contaminate the field; I find that unhelpfully dogmatic.
Now, do behavioral findings collapse the postulate of rationality or other bedrocks of economics? No way, but the neurobiological heuristics found, considered either as strengths or weaknesses, are definitely interesting.
A modified version of Akerlof’s Nobel Prize speech is titled Behavioral Macroeconomics and Macroeconomic Behavior, and I find it worthwhile (although I disagree with it on several occasions, since I tend to side with New Classical models).
Admittedly I don’t know much about behavioral economics. I do know their notion of “expressed preference” is similar to the Austrian one, so that’s a positive at least.
To claim that behavioral economics is psychology and hence must be purged from “pure” economics is to say that all interdisciplinary research can only contaminate the field; I find that unhelpfully dogmatic.
Now, do behavioral findings collapse the postulate of rationality or other bedrocks of economics? No way, but the neurobiological heuristics found, considered either as strengths or weaknesses, are definitely interesting.
A modified version of Akerlof’s Nobel Prize speech is titled Behavioral Macroeconomics and Macroeconomic Behavior, and I find it worthwhile (although I disagree with it on several occasions, since I tend to side with New Classical models)
Akerlof is the man, seriously, that’s an awesome paper.
It’s funny that Austrians out of all people would criticize interdisciplinary approaches, the vast majority of Austrian economics is somewhere on the border of political science and economics. I don’t know the exact relationship between the MI and the GMU/ WVU crowd but the latter take an active interest in political science, economics, sociology and anthropology (with a few notable exceptions, I think a lot of it is bullshit though).
I have to say, I don’t get the Austrian hostility here. Sure, Mises demarcated psychology from “praxeology” (a mistake in and of itself) but as a methodological issue I don’t think he ever took issue with using multiple approaches to explain real world phenomena. Like I said, I don’t know much about behavioural economics so I can’t say much substantive, but to be honest it does seriously look like it meets many of the criticisms launched again “rational economic man” from laymen and heteros.
Admittedly I don’t know much about behavioral economics. I do know their notion of “expressed preference” is similar to the Austrian one, so that’s a positive at least.
What do you mean expressed preference? Revealed preference has been a staple of “mainstream economics” for a long time now. WARP and SARP anyone?
No. It simply isn’t economics. It’s plain psychology.
Even if it weren’t economics, to call it plain psychology is wrong. It draws on a variety of disciplines including biology and decision theory.
It’s funny, Austrians and other heteros have long been claiming that mainstream economics is flawed because we can’t perform “tests”. Well, experimental economics comes around and economists have found clever ways to test their theories in the lab. When experimentalists concluded that economic theory is basically correct, the Austrians seem to fall kind of silent.
I thought mainstream microeconomists thought of utility as a function, independent of that person’s choices?
Mathematicians also fall silent when experimental mathematics reveal empirical data that shows that triangles out in nature really do express a 3 sided nature (to a good margin of accuracy)
this silence is known as stupefaction
From Wikipedia
Revealed preference theory, pioneered by American economist Paul Samuelson, is a method by which it is possible to discern the best possible option on the basis of consumer behavior. Essentially, this means that the preferences of consumers can be revealed by their purchasing habits. Revealed preference theory came about because the theories of consumer demand were based on a diminishing marginal rate of substitution (MRS). This diminishing MRS is based on the assumption that consumers make consumption decisions based on their intent to maximize their utility. While utility maximization was not a controversial assumption, the underlying utility functions could not be measured with great certainty. Revealed preference theory was a means to reconcile demand theory by creating a means to define utility functions by observing behavior.