Saturday, 30 July 2011

Two challenges for behavioural economics - one real, one fictional

It seems that some people from outside behavioural economics are, like me, getting frustrated with the lack of progress within the field.

Eric Falkenstein says here:
I read Kahneman, Tversky and Slovic's Judgement under Uncertainty in the 80's (published 1982), which mainly discussed a series of papers published in the 1970s, and found it fascinating, but now it's now 30 year old stuff and pretty boring. There's a couple hundred academically based confirmed biases which are all kinda true, but not very profound
This part of the posting is quite right. A commenter at the bottom sums up the problem with state-of-the-art behavioural "economics":
Behavioral economics is not economics but psychology. It focuses on individuals instead of exchanges and markets.
Economics makes assumptions about actors to make market predictions. BE makes predictions of actor choices just like psychologists.
The question BE must address is how do biases create market conditions. To date I have not seen BE translate into markets.
I have written something similar here; part of my ongoing research is to build good descriptive and predictive models of how markets work under "behavioural agent" assumptions. This is a good insight and I would like it to be more widely recognised.

However, Falkenstein goes on to make the following common, but fallacious, argument:
So, Sendhil likes to play to standard liberal pieties about how government can help and inequality is the result of evil and prejudice (he's big on the stereotype bias, another publication bias result gone viral). Yet he forgets the most profound behavioral bias in this literature that is delightfully recursive:

We think we are better than average at not being biased in thinking that we're better than average.
This is true especially for people who have studied this subject at college. Thus, the behavioralists neatly infer from the literature that everyone else is biased.
This is nonsense.

Experts in psychology are fully entitled to claim to understand others' biases without being biased themselves. This is not because they are magically immune from cognitive effects themselves. Of course, psychologists are fooled by pricing tricks or guided by default options just like the rest of us (maybe a little less, but not much).

No - the problem with this argument is that it's based on a blatant category error. The reason that experts are allowed to talk about biases is that while being an expert, they are operating in a completely different context than the things they are describing. We allow politicians to make laws about drunk-driving, despite the fact that many of them drink alcohol themselves: because when making laws, they are not driving (and mostly not drinking). Would you refuse to be prescribed glasses by an optician who wears contact lenses herself? No - prescribing glasses is an entirely different activity to being able to see. Could you talk in July about the possibility of eating too much at Christmas? And can a physicist write about how aeroplanes defy gravity while being personally held firmly on the ground by a gravitational force? Er, yes.

There is no contradiction in any of those situations. You can describe a process while not currently experiencing it. You can sit back and rationally consider - or model - a psychological effect, using your imperfect brain to do so, and then go out onto the street an hour later and find yourself subject to the exact same effect.

This argument is so nonsensical that - in the absence of bad faith - I can only imagine a series of intellectuals sitting back in their chairs with a whisky, so self-satisfied with cleverness in spotting the behaviouralists' hypocrisy that they smugly and immediately write it up without ever stopping to ask if the reasoning makes any sense. I am sure there's a cognitive bias to describe that, but if I claim right now to know what it is, I might be accused of suffering from it. Better wait till I'm feeling rational again.

1 comment:

PunditusMaximus said...

Yeah, that's pretty obviously bad faith. I'd say something about conservatives and their incapacity to argue in good faith, but I freely admit that it could just be revealed preference.