Rethinking Economics - Decision by Sampling, or ‘Psychologists Reclaim Their Turf’

Economists use a lot of math and so like to keep the study of individual preferences very simple, says this article. But psychologists know that an individual's preferences are strongly related to the group they are in.

For instance, go to a party where everyone is knocking the beer and wine back and you might think that having two glasses of wine is very moderate. But go to another party where everyone is teetotal but they say they will open up bottle of wine for you if you want, you might think having two glasses of wine is a bit excessive.

This is a nice short essay.

Economists like to base their theories on individual decision making. Individuals, the idea goes, have their own interests and preferences, and if we don’t include these in our theory we can’t be sure how people will react to changes in their economic circumstances and policy. While there may be social influences, in an important sense the buck stops with individuals. Understanding how individuals process information to come to decisions about their health, wealth and happiness is crucial. You can count me as someone who thinks that on the whole, this is quite a sensible view.

Naturally, psychologists are also interested in this area, but in terms of formal mathematical theories they’ve historically been one step behind. However, they are now catching up and in my view overtaking dominant economic theories. One advantage psychologists have is a plausible idea of how people actually make decisions, which in practice means the rules people follow in their theories have to be simple. Decision making is typically procedural, comparing different aspects of a problem one at a time rather than all together, and this means preferences are constructed rather than innate, taking time to arrive at and varying by context.

http://www.rethinkeconomics.org/journal/decision-by-sampling-or-psychologists-reclaim-their-turf/