My view, which I think concurs with Laibson's: a single broader theory is possible. I think we've hit a theoretical dead end with the traditional maximising agent, so it will have to be based on more psychologically realistic foundations, such as those of Velupillai, Gigerenzer or Bettman, Payne & Johnson. To achieve this, we need to carefully choose the right elements to build into our model of decision-making in a way, so that it can make useful predictions of how those elements might operate. I have a paper coming out later this year which suggests one direction towards this.Knowing and Making
On the identity and methods of behavioural economics
Leigh Caldwell | CEO, Inon Pricing Advisers
The innovative disruption behavioral economics has introduced is impelling the search for a general theory incorporating behavioral (empirical) research and is pushing economics closer to psychology and the other social sciences. That can only be a good thing.
Non-behavioural economists have considered consumers' imperfect ability to learn the preferences of other consumers, or the rules of the "game" they are playing, as a factor in non-optimal decisions. But psychologists know much more about exactly how people learn than economists do - so a successful model of learning as part of economics can only be built with an openness to psychological research. Where Levine may be right is that behavioural economics will not replace mainstream economics, but instead the two fields will merge - with the behaviour of consumers predicted by a combination of objective economic, and subjective psychological, factors.
Anyway, arguments over the boundaries of disciplines are rarely productive: I don't really mind if Levine considers a model to be behavioural or not, as long as the model advances the cause of making successful predictions.
The real questions are: does standard economics fail to address some important problems? How good is behavioural economics at addressing them instead? And does behavioural economics need a unified approach in order to address them?
Most of the people mentioned above have different answers to those questions.....
Suppose we were able to (magically) create the entire set of possible outcomes for an economy at a given instant in time and place a probability on each. We know that only one reality that will happen and can exist so as we go on and make successive guesses to the next set of outcomes, and the next and so on, there is a limit to what can be predicted in a complicated, dynamic system like econ, even if we had perfect knowledge of every possible outcome.
ReplyDeleteBecause there are so many variables, precision is lost with successive estimates over time. The more data points you analyze, or the more frequent the measurements, it doesn't really help. It's one of those stubborn mathematical impossibilities that can not be eliminated by any reasoning, logic, equation, method, nothing can over come it! nothing. It's a fools game.