Wednesday, 6 January 2010

Cognitive economics

I have hinted here that what is often called behavioural economics would be more fruitfully examined in conjunction with cognitive economics, the study of thoughts, beliefs and decisions, and their economic effects.

Recently at Inon we've been developing a model for cognitive economics. It integrates the preference-based approach of conventional economics and a model of beliefs or awareness which we call the attention function. This model promises to offer explanations for a number of cognitive and behavioural phenomena which don't fit into the neoclassical model, and should also be abstract enough to be generalised to higher level economic structures.

Today I've found someone else who agrees with the cognitive/behavioural distinction: Marco Novarese. The link is a page about developments in cognitive economics (mostly in the last ten years). This paper is a good outline of some of the issues in the field - though the paper itself proposes no cognitive theory that is generalisable to the microeconomic level, let alone macroeconomics. Novarese works at the Centre for Cognitive Economics (which I had not come across before) in University of Piemonte Orientale in Italy. I'll be following the centre's research in more detail now and will link to any interesting developments on the blog.

Via his site I came across this Douglass North paper which touches on some similar ideas. I find North an excellent economic thinker; much of his writing has clearly identified the challenges for economics in cognition, culture and the study of institutions; and although he hasn't solved all the problems he has set out a tantalising research agenda for those interested in them.

Some excerpts (in the area of cultural ideology North goes beyond the study of individual beliefs to which I would confine myself, but it's still very interesting):
Therefore the central questions that confront economists in cognitive sceince are not only how human beings learn and meld beliefs and preferences to reach decisions and hence the choices that underlie economic theory but also how and why do they develop theories in the face of pure uncertainty, what makes those theories spread amongst a population or die out, and why do humans believe in them and act upon them?

...[on game theory] With small, personal exchange it pays to cooperate since the players interact repeatedly. But with impersonal exchange, to use the game theory analogy, it pays to defect. Historically it has been the creation of political and economic institutions that have altered the payoff to reward cooperation. But throughout most of history and still today in many societies the necessary institutions--particularly the political ones--are not forthcoming. It entails a fundamental restructuring of a society to create a world of impersonal exchange--a restructuring that has typically not been forthcoming. Since institutions reflect the belief system of a society then we must turn to the diverse cultural heritages of society...

While institutions structure the external environment between human beings, ideologies structure the mental "environment" thereby making predictable the choices of individuals over the range of issues relevant to the ideology. But what makes individuals susceptible to having their mental environment structured?

...[Ken Binmore] maintains that we come equipped with algorithms that not only interpret the behavioral patterns we observe in ourselves and others in terms of preference-belief systems but actively build such models into our own operating systems.

1 comment:

Tom Hickey said...

I am heartened to hear this. I have thought for some time that economics is lagging behind cognitive science in the sense that some of the fundamental assumptions of economics are questionable in light of cognitive studies.

While it is true that there is no overarching cognitive model, this is pretty much true of the social sciences, so I don't see this as a serious flaw. All of science is a work in progress anyway. As quantum mechanics demonstrates, even something as seemingly simple are measuring the position and momentum of a particle can present a conundrum.

One fruitful area for exploration might be George Soros's notion of reflexivity — how feedback of information in a society influences future real states. Others are the economic notions of utility considered in terms of happiness or satisfaction, and rationality in relation to both the irrational and uncertainty.

My impression is that many assumptions designed to simplify complexity for modeling tend to be simplistic to the degree that the model becomes questionable as a model of actual conditions. The reason for this complexity of human action seems to be in large part cognitive.

Look forward to hearing more about this field.