Tuesday, October 10, 2017

David Ruccio — Nobel economics: the behaviorism of economic decisions and its secret

Paraphrasing that nineteenth-century critic of political economy, we might say that “economic decision-making appears, at first sight, a very trivial thing, and easily understood. Its analysis shows that it is, in reality, a very queer thing, abounding in metaphysical subtleties and theological niceties.” We might credit Thaler and other behavioral economists, then, for having taken a first step in challenging the traditional neoclassical account of rational decision-making. But they stop far short of examining the perverse incentives that are built into the current economic system or the alternative rationalities that would serve as the basis for a different way of organizing economic and social life. And, in terms of economic theory, they appear not to be able to imagine another way of thinking about the economy, as a process without an individual subject.
David Ruccio points to the assumption of methodological individualism as the problem. I agree it is central.

However, I would go further and say that economics cannot limit itself to economic choice and create models that can possibly be representational of reality since home economicus is a gross oversimplification. 

It is difficult to conceive of any choices with which most people are presented that are exclusivity economic, and those are trivial. "Chocolate or vanilla, or some other of our 28 flavors?"

Human life is social. Homo socialis is the norm and homo economicus is an idealized abstraction. Making homo economicus the norm in a world that assumes methodological individualism is tantamount to assuming "there is no such thing as society" (Margaret Thatcher after reading Hayek).

Humans are embedded in environments — social, political, economics and ecological. Human individuals exist in networks of relationships, and these relationships are reflected in different ways in different societies base on culture and institutional arrangements, as well as historical and geographical conditions. Assuming a "standard individual" as methodological individualism does, e.g., as a homogenous representative agent unaffected by network connections, is so far removed from the reality of human action and interaction that it is not only useless but also dangerous if applied outside a model by presuming it to be realistic.

Moreover, humans don't make choices based on "reason" alone. They make choices based on affect as well, and often affect trumps reason. Feelings may be base or noble. For example, it is always reasonable to go beyond reason to love.

Even within the use of reason, different degrees of rigor are applied in different situations based on ability, on hand, and transaction cost, on the other. Most people don't have the ability that economists regularly assume they have, nor do they have access to the information if they do. In addition, rigorous analysis also takes transaction cost into consideration. Spending more time on decision making then is at stake in the decision is irrational. Smart people use heuristics instead.

All such considerations are excluded from economic analysis, which OK at the theoretical level. Theoreticians can chose freely to explore what and where they wish.

But excluding such considerations from applied economics, especially political economy, is disastrous for individuals and societies alike, as will as the entire world.

Economics applied to policy formulation needs to be realistic and and for models to be tested  their claims need to be tested using the tools of scientific method. Otherwise, GIGO, where people's lives are at stake. Policy also influences the future of the societies affected by it, as well as the entire world in the case of policy choices of dominant nations.

As matter of fact, policy makers seldom consider only economic advise since they are politicians that must balance a range of interests. However, economic input is a powerful influencer. Moreover, many politicians likely operate on confirmation bias and are prone to select in advise that agrees with their ideology and select out that which does not. 

As result of political competition that is based on ideological differences as well as competing interests, it essential that debate be well-informed so that persuasion is minimized and arguments are based on logic and evidence instead of assumptions that may not be realistic but go unrecognized.

Occasional Links & Commentary
Nobel economics: the behaviorism of economic decisions and its secret
David F. Ruccio | Professor of Economics, University of Notre Dame

See also

Lars is not criticizing the selection of Thaler, but rather, pointing out that his selection contradicts their own statements about rationality.

Lars P. Syll’s Blog
Nobel Committee making a colossal fool of itself
Lars P. Syll | Professor, Malmo University

1 comment:

AXEC / E.K-H said...

The economics Cargo Cult Prize
Comment on David Ruccio on ‘Nobel economics: the behaviorism of economic decisions and its secret’

Economics is a failed science and because of this the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel” is an absurdity ― or worse.#1 The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, and materially/formally inconsistent.

Today’s economics is nothing but the pluralism of provably false theories or, in Feynman’s words, cargo cult science: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”#2

What economists have not realized until this day is that economics is NOT a science of behavior,#3, #4 Behavioral Economics from Adam Smith’s Theory of Moral Sentiment, to homo economicus, to bounded rationality, to Richard Thaler’s nudge is not economics at all but the very subject matter of sociology, psychology, anthropology, Political Science, history, etcetera.#5 The subject matter of economics is the economic system.

The lethal defect of economics is that it is microfounded, i.e. based on behavioral axioms. Now it holds that (i) there is NO such thing as an invariant of human behavior, and (ii), NO way leads from the second-guessing of Human Nature/motives/behavior/action to the explanation of how the economic system works.

After 200+ years of behavioral economics, economists still have no idea of how the market economy works. It is common knowledge that all profit theories are defective: “A satisfactory theory of profits is still elusive.”#6

This means, to this day neither the Walrasian, nor the Keynesian, nor the Marxian, nor the Austrian cargo cultic sect can tell what macroeconomic profit is.#7 Hence, they fail to capture the essence of the market economy. This is not exactly a noteworthy scientific achievement of the economics profession.#8

Does the world expect from economists to find out how people behave? No, this is the very job of psychology, sociology, anthropology, etcetera. Does the world expect from economists to figure out what profit is? Yes, of course, no philosopher, psychologist, biologist, or sociologist will ever try to figure this out.

Have economists done their proper job? No. Do economists know what profit is? No. Does behavioral economics help to find out what profit is? No.

It is not the task of economists to dabble in the so-called social sciences. The subject matter of economics is the economy. Economics is a system science and has to be based on macrofoundations. Economists are still caught in a cargo cultic paradigm. They do not deserve any prizes but to be thrown out of science.

Egmont Kakarot-Handtke

#1 Economics: 200+ years of scientific incompetence and fraud

#2 What is so great about cargo cult science? or, How economists learned to stop worrying about failure


#3 Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.

#4 For details see cross-references Not a science of behavior

#5 PsySoc — the scourge of economics

#6 Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online
http://www.dictionaryofeconomics.com/article?id= pde2008_P000213

#7 You are fired!

#8 The real problem with the economics Nobel