Thursday, 13 August 2009

A perfect example

This story, from the Washington Post via Free Exchange, is a perfect example of the challenge for behavioural economics.
For weeks after he was laid off, Clinton Cole would rise at the usual time, shower, shave, don one of his Jos. A. Bank suits and head out the door of his Vienna home -- to a job that no longer existed.
It's easy to look at this and say "he's not behaving rationally. How amusing - people are a bit nuts sometimes".

It's much harder to look at it, work out a plausible model for why he behaves that way, find an abstract description of the model, extrapolate it to other situations which appear different on the surface, and test your theory against experiment or data.

But that's what behavioural economics - or cognitive economics, or the study of decision-making - has to do.

I've just finished Vernon Smith's memoir Discovery, about which I may write more later - but here's a very perceptive couple of quotes:
...the cognitive psychologists, and behavioral economists, tended to have the same perspective of the economics profession: When subjects got it "wrong", they were being "irrational", and we should not question the theory or our interpretation of it.
Some have naively defined behavioral economics as the search for results contrary to standard models. [As] I see it...its successes represent potential extensions of reformulated standard models.
If behavioural economics is going to be useful, we have got to get around to doing this modelling work. That means doing mathematics, and making simplifying assumptions, and all those things that some economists have suddenly become squeamish about. Don't be afraid of these techniques: they are the essence of economics.

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