Thursday, January 24, 2008

What say you, economists? (Tirta)

Triggered by a series of discussions here and there, Tirta posed the following 'challenge'. -- Manager
What Say You, Economists?

by Tirta

Following our interesting -- and at times heated -- discussion on the limits of economic analyses in explaning human decision making (e.g. this, this, this, this, and this), here are two Daniels:

Economists often criticize psychological research for its propensity to generate lists of errors and biases, and for its failure to offer a coherent alternative to the rational-agent model. This complaint is only partly justified: psychological theories of intuitive thinking cannot match the elegance and precision of formal normative models of belief and choice, but this is just another way of saying that rational models are psychologically unrealistic. - Daniel Kahneman (2003), "Maps of Bounded Rationality: Psychology for Behavioral Economics", The American Economic Review, 93(5), p.1449.
Most modern economists would disagree with this statement [Wealth may be measured by counting dollars, but utility must be measured by counting how much goodness those dollars buy.] because economics is currently committed to an assumption that psychology abandoned a half-century ago, namely, that a science of human behavior can ignore what people feel and say and rely solely on what people do. - Daniel Gilbert (2006), Afterword, "Stumbling on Happiness".
So what say you, economists?


  1. the way i see it, any theory should be judged on how well it explains reality.

    do economic theories explain "stuff" well? -- depends on who you are and what you want to explain.

    i think that economics is spectacularly bad at explaining many economically important phenomena, and think it fruitful to take a good critical look at economic orthodoxy.

  2. This kind of debate has actually, more or less, summarized in the work of Pareto (1909) in his Manual of Political Economy and stated further in his Treaty of General Sociology (1916).

    Economics, I think, studies logical decisions which are derived from given and known preferences. These given and known preferences are placed even before decision makers make their choices.

    Here, it becomes difficult to conceive them as other than logical or rational. Indeed, "if you truly have preferences, you will automatically lose out if you do not pursue them!" just like Ramsey (1926) said.

    To clearly mark this epistemological split between economics and other behavioral sciences, put it as psychology, economists have used the following axiomatic approach: if one accepts a few logical axioms, which are irrefutable to economists, then for each individual there exists a unique order of preferences which characterizes them.

    Thanks to such axioms, then, debates on rationality have ended, the psychology or sociology of economics have exited, and mathematics has risen.