Behavioral economics under attack
Here is an interesting article. I have not yet finished reading Nudge (though enjoying it) and Predictably Irrational is next on my to-read list, so it’s difficult for me to refute or support this piece.
http://www.slate.com/id/2283063
I will say that I don’t think it was Thaler & Sunstein’s intent to offer anything more than evidence (at this stage) that the classical economics models aren’t adequate in determining how people actually make decisions. (Have we forgotten LTCM?) I would however be interested in hearing their response to this challenge. I would also add that Thaler & Sunstein do point to “the why”: our Automatic and Reflective Systems (as discussed in the first chapter). We can describe these systems quite well, in fact – they do in the text – and there is considerable evidence to believe they are accurate models of how we think
http://www.scientificamerican.com/article.cfm?id=of-two-minds-when-making
Curious if Pinker would agree, but I digress.
Gigerenzer and Berge are not wrong in their complaint; we do not have a complete description of our decision making system – there is no equation we can write down that says this is exactly how we behave. I guess the question is, do we need it to gain insights? (I would say no.) Is it sufficient to design experiments to test these black boxes that are our Automatic and Reflective Systems? (I would say I don’t know.)
Anyway, Gigerenzer seems to have something interesting to say: “Gut Feelings” looks like an interesting read and will end up on the wishlist:
The key concept—rules of thumb serve us as effectively as complex analytic processes , if not more so—is simple to grasp. Gigerenzer draws on his own research as well as that of other psychologists to show how even experts rely on intuition to shape their judgment, going so far as to ignore available data in order to make snap decisions. Sometimes, the solution to a complex problem can be boiled down to one easily recognized factor, he says, and the author uses case studies to show that the Take the Best approach often works.
I’m going to have to add Basic Instincts to my wishlist, too, since it was mentioned in the article along with Nudge and Predictably Irrational, besides also looking interesting. (I am humored that this article actually “nudged” me to add another book on the exact topic it’s trying to refute!) If any of you would like to borrow Nudge (or anything else on this or related topics, for that matter), let me know.
Cheers,
Ken
Merf's comment (properly reformatted this time):
ReplyDeleteI might object to your characterization that we do not need to understand the "how" of decision-making to gain insight. The purpose of a scientific theory (using the term VERY loosely) is to BOTH predict and to explain. Friedman offered up his "as if" defense (as Harford refers to it) in "The Methodology of Positive Economics" and was answered (essentially as I've paraphrased it) by H.A. Simon a few years later in "Problems of Methodology--Discussion." It's somewhat akin to the idea that utility in a theory is the metric of interest rather than explanatory power.
Now, I haven't read Gigerenzer and Berg's critique; I assume there is some publication somewhere that I'll now try to track down--but I don't think I agree with their characterization of behavioral economics in general and prospect theory in particular. The point there was less, I think, the mathematical product that results (though Kahneman did receive a Nobel for, among other things, the model). Much more important is the alteration of basic assumptions regarding the nature of the problem and the actors engaged in the problem. That, alone, enhances the explanatory value of the resultant model (I think...perhaps...maybe).
And my response:
ReplyDeleteI guess what I was trying to say (as did so poorly) was that they shouldn't discount behavioral economics just because we don't (yet) understand the "how". So I think we are actually in agreement. And I would agree that to obtain "scientific" validity, one does need to have both predictive and explanatory "ability", if that makes any sense. As Hawking's wrote: "A theory is a good theory if it satisfies two requirements: It must accurately describe a large class of observations on the basis of a model that contains only a few arbitrary elements, and it must make definite predictions about the results of future observations..." and goes on to discuss the "unprovable but falsifiable" nature of theories.
Since I'm a hack physicist, psychologist, and now behavioral economist I like the popular science version as given by Miller in "Spent". This is because the reasons we care do not have to be summed up in an exact theory. Behavior does not mean, I think by definition, precise action. Therefore, what we want someone to do does not mean we have to get everyone to do it. We only have to get some people to trend in that direction...and then like sheep the rest will follow.
ReplyDeleteAn exact theory would, in theory, apply to an exact individual...and a rational actor at that. How could it apply to someone with schizophrenia for instance? And unless I miss my guess the number of us with various degrees of schizophrenia is uniformly distributed around some percentage with most of humanity in the tails, nevertheless still in the distribution. Basically we have two half's in our brain. Unless surgically separated there are still many connections between the two. At any given moment either side could be making decisions for us...with either side changing quantum states ceaselessly and very fast (sexist comment retracted).
Some like to call these phenomena free will. Those who study behavior would simply like to define it explicitly. I don’t think it can be defined explicitly because our brains are alive. They are the perfect random number generator based on their quantum roots. And they continue to evolve. What drives our behavior today could be completely different from yesterday. All it takes is burning our hand on the stove once.