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Where were you with your clear explanations when I was in grad school? I think I will send this post out to all of my colleagues.

This is a huge dilemma in health economics and health system planning. But throwing everything into the lap of Arrow and information asymmetry--a common highbrow rhetorical tactic--does not cut it, and you are correct to say we don't have a good toolkit. You cannot indefinitely sustain something that grows faster than the economy, but evaluating productivity and quality is difficult. Even in a system where consumers pay 100% for health care, you cannot rely on revealed preference because people are subject to all kinds of suasion, aversion, and defensive over-consumption.

We also can't underestimate the organizational politics where a huge, multi-billion dollar public program has been captured by occupational monopolies, and who lobby the public relentlessly. I was in Winnipeg recently and saw a pre-election sign from a union urging people to vote to "save" health care (i.e., "You only have one vote. Use it to save my job."). The system is hardly under threat, yet some people buy that.

I think the behavioral economics of health care have more to do with individual decisions, but the economic impact of those individual actions is weak compared to impact of organized interests. Health care productivity is terrible and probably shrinking, even with new money. And there are few reliable measures of MB, especially when you want to target MB that is caused primarily by the health care system.

Frances,

"The economic approach to policy analysis is deductive - economists begin with assumptions about consumers' and firms' preferences and behaviour, and these assumptions allow us to say things like 'insurance leads to excess consumption of health care services.' (Or 'firms will pass through savings from the elimination of PST on inputs to their consumers.')"

&

"Once you fall down the rabbit hole, you just have to keep on going. If people's choices are not a reliable guide to their well-being, you have to turn to something else. Ask people how happy they are and measure well-being in terms of happiness. Evaluate health care spending by looking at objective measures of health, such as mortality, morbidity, or survival rates. Chuck out the entire elegant theoretical framework of welfare economics."

Why not just use BE to modify the assumptions and see where those get you? At the bottom of it all, people make the right choices when given the right information and/or the skill to evaluate said information. These two roles are performed by 'institutions'.

If you disagree with the premise (at the bottom of it all), then psychology or BE will be no help either. Either BE or psychology can be used to insert premises/modify assumptions, or there is no knowledge to be gained. There has to be a link between means and ends no matter how feeble such a link is, if you want to be able to learn something about human behavior to predict it.

The fact that we in fact can and use economic tools to in fact build markets to attain certain ends, means that that this link exists. And BE and psychology can inform those models


Or to think about it in a different way, how did we ever get to the homo economicus if not through crude BE-experiments? Economic models are informed by our knowledge of the external world and BE and psychology merely add to it. The basis is sound.

Mike - your comment made me glow inside. Thank you.

Shangwen - as always, your insider knowledge of the Canadian health care system really adds to the conversation.

Martin: "At the bottom of it all, people make the right choices when given the right information and/or the skill to evaluate said information. These two roles are performed by 'institutions'."

What is the right information to give people? For someone working in marketing (where a lot of economic psychologists do work), this question is easy enough to answer: the right information is the information that gets people to buy stuff.

But what information would a benevolent dictator want to give people? The whole notion of a "right choice" assumes that there is some kind of stable underlying set of preferences, some one choice that is best - in other words, it assumes the premise that behavioural economics research calls into question.

Look, I haven't swallowed the blue pill. Behavioural economics explains stuff that standard models can't. But I think people underestimate the extent to which behavioural economics fundamentally challenges the basic economic paradigm, from Mankiw's 1

Finishing that thought... people underestimate the extent to which behavioural economics fundamentally challenges the basic economics paradigm, from Mankiw's 10 principles to the entire grad theory curriculum.

OLA - your comment has been unpublished. Further comments of this nature will lead to you being blocked from this site.

Okay, people's choices are not a reliable indicator of their wellbeing. But is anything better? There's a reason economists talk about utility rather than happiness - it's quite possible to come up with situations where people value things above happiness (eg religious motivations). What right, in other words, does a psychologist, or any other 'ist have to decide for me that my happiness is more important than my choices?
And, well, I've read a bunch of the psychology literature about our psychology, and nothing in that implies to me that psychologists, or economic behavioural scientists, are more free of the factors that lead us to make bad choices than anyone else. If a lay person's demand for healthcare can be affected by framing, salience, or other options, why couldn't a behavioural economists' assessment of people's choices be affected the same way? (This generally worries me about behavioural psychology that indicates that people are making bad choices, on the one hand I am inclined to believe it, on the other hand, the more I believe it, presumably the more I should distrust the people reporting said research and thus not believe it).

I wonder to how much extent the difference in the two approaches is simply another way of saying that experimental data allows you to be pretty agnostic about theory, while non-experimental data requires a model in order to make sense of it.

It occurs to me that the great recession/lesser depression is to economics what the LHC is to physics.

"I think people underestimate the extent to which behavioural economics fundamentally challenges the basic economic paradigm"

But if the old paradigm doesn't explain the world as it really is, shouldn't it be thrown out?

Another dilemma is economics as descriptive vs. prescriptive. Are economists trying to understand the world as it is or are they trying to layout a set of axioms by which we all must live? What if people decide they prefer to arrange the world in ways an economist would brand sub-optimal? Is it really sub-optimal if we prefer it? By contrast, physicists don't face this conundrum (cats in boxes notwithstanding). Electroweak symmetry breaking works the way it works whether we like it or not. No amount of marketing or obnoxious talk radio is going to change anything.

I buy "Fair Trade" coffee because the package claims that it was not grown and picked by slaves. Whether or not it actually was not grown and picked by slaves, I don't know, but it assuages my guilt about coffee a bit, I can afford the extra cost, so I generally buy it. How it tastes is not a consideration. With enough cyclamates in it and a touch of salt, any coffee tastes good to me.

"when coffee is given a fair trade label, people say it tastes better, even if it's just regular coffee"

HA! My gut reaction was "gee, people are really hopelessly stupid". Then I remembered that I buy fair trade coffee ... because I think it tastes better. Oh well.

But then again, why couldn't it *really* taste better? Why wouldn't our brain wire together the taste of our coffee with our belief that the coffee was obtained through fair and mutually beneficial exchange with other humans. And if you value mutually beneficial exchange, why wouldn't your brain reward you by making your coffee taste better?

Similarly, if you value getting the lowest price over all else, then maybe labelling the coffee with something conveying that message (Off the top of my head, I can't think of anything that isn't silly like "produced by slaves"), might make the coffee taste better for someone who values low prices.

Here (I think) is an example of a failed attempt to apply econo-behavioral thinking in an asymmetric context.

Hospitals have been trying to improve outcomes and control costs in surgery, where one cost to the system is the lengthy and sometimes complicated process of rehab. There is tissue trauma, muscle atrophy, and pain all getting in the way of recovery, so you need the aftercare. However, the cost of post-surg rehab was rising, and forcing out rehab patients in other areas.

So a bit of incentive-based thinking was tried, leading to "Prehab", or a pre-surgical health improvement program. Depending on the surgery, this involves losing weight, strengthening muscles, better cardio health, quitting smoking, better diet, etc. etc., all before the surgery. But you would still get post-surg rehab, just less, hopefully.

Prehab has been promoted to patients on the usual basis--prevention--but in many settings it has also offered the ultimate Canadian get-out-of-jail card: a big bump up the surgical wait list. If you are fitter and thus likelier to have a better outcome, you might get the surgery sooner. So that was the incentive part. In Frances's terms, you get higher subjective and objective utility in MB, and there is less DWL. That is good.

So what has happened? (BTW, I am not referencing published studies; I'm recapping discussions I've had with colleagues who did internal evaluations in these programs.) First, lots of people bought into it, because of the incentive (faster surgery). Not surprisingly, there is a noticeable education/income gradient in the uptaking population.

Second, total post-surg utilization of rehab has not declined. Medically, RCTs on prehab would suggest that there should be less need for it, but it is optional and not capped, so people consume it. One colleague said to me, "People just want to keep using it. That's it." So, people increased their consumption, going from Qa to B' or B'' (infinity and beyond?), thus driving up DWL or, more likely, inadvertently creating disutility for other rehab patients on different wait lists. The designers of prehab said, "the Red Pill is too costly. Take the Blue Pill and we'll reward you," but they did not prohibit people from taking both.

That purple pill was not purple. Back to the drawing board.

Stephen: "experimental data allows you to be pretty agnostic about theory, while non-experimental data requires a model in order to make sense of it."

Interesting point.

Patrick - the same researchers also did some work with chocolate. They found that the brand of fair trade chocolate that they used in the study actually *did* taste better. In otherwords, even when they put the non-fair trade label on the fair trade chocolate, people still ranked it more highly than the other chocolate. It's also relevant, I think, that the study was done with German undergrads - as you say, you might not get the same results with a random selection of Wal-mart shoppers (I asked the speaker about this, and he told me that there are no Wal-marts in Germany so the question doesn't arise).

Ed - I do too.

Tracy W: "What right, in other words, does a psychologist, or any other 'ist have to decide for me that my happiness is more important than my choices?"

I think you've perfectly articulated the "blue pill" position there - the fundamental attraction of the economic way of thinking.

Patrick "Another dilemma is economics as descriptive vs. prescriptive. Are economists trying to understand the world as it is or are they trying to layout a set of axioms by which we all must live?"

Well, given economists' willingness to pontificate on the virtues of HST, free trade, competitive markets, etc etc I think the answer has to be that economics-as-we-know it is prescriptive. And behavioural economics calls many of these prescriptions into question.

Shangwen - another fascinating example.

Do people play too much tennis? Or too little?

An economic psychologist or behavioral economist may be able to tell us lots of true things about what tends to make people play tennis more or less frequently (a regular partner to play with, recent media coverage of tennis, whether there is a tennis court nearby and whether it charges fees or is paid for by the state, etc.), but would we conclude that has offered us any insight into whether people are playing the optimal amount of tennis? Should we worry that the fact that there are a bunch of factors that have been demonstrated to make people more or less prone to tennis-playing challenges our basic economic paradigm (to swipe a phrase from Frances Woolley above)?

I would hope that most people see that the very notion of an optimal amount of tennis to play that doesn't put the individual's preferences at the center of it all is strange, maybe even disturbing. You have to start from there, or the whole thing is meaningless. That's not to say that an economist or a behavioral psychologist has no useful insight to offer the tennis player: they might well be able to point out that given how often you play tennis a membership at the local club that you can walk to is cheaper in the long run than driving 20 minutes to the "free" municipal courts if you value your time more than $X, or that if your goal is to play tennis every morning as part of your exercise regime you're much more likely to do it if (say) you place your racket and tennis clothes where you can see them upon waking up or have a standing date with a tennis partner. But it hardly strikes me as a failure that they can't tell you, "Really, in the best of all possible worlds your MB curve ought to slope like this." And the fact that you wouldn't want to play as much tennis as you do if you hadn't just watched the US Open is an interesting psychological phenomenon, not an indictment of the entire notion that your preferences ought to be respected.

"Behavioural economics differs from economic psychology in that it is typically conducted by economists rather than psychologists"
I thought Kahneman, Tversky and Ariely were the prototypical behavioral economists. All of them have backgrounds principally in psychology rather than economics.

Economics, like Darwinian Biology, is an empirical / causal explanatory science. It _isn't_ an inductive or experimental science.

Economics begins with a problem raising patterns in our experience, most importantly the pattern whereby individual plans are globally coordinated as if part on one larger plan, and prices tend toward costs, and where there is an extensive division of labor.

And this problem in our empirical experience is explained by a contingent causal mechanism: learning and changes in judgment by people in the context of changing relative prices and local conditions.

Learning and changes in judgment are a causal force -- causally explaining global design-like order in the coordination of individual plans in a society with property and prices.

The FACT that economists don't understand HOW there field is a science leads to the great pathology of what the telite in academia attempt to produce as "science" in their quest for status, tenure, financial reward and academic power.

@Joshua:

As Arnold Kling noted, when discussing the desire to impose one's own preferences on others, "In some ways, behavioral economics is even worse. Instead of saying, 'I would rather that you not eat a high-calorie dessert,' the behavioral economist says, 'I claim to know better than you whether or not you would really like to eat a high-calorie dessert.'"

That is part of the ethical dilemma--there has been so much elite chatter and enthusiasm for BE, one suspects it has just become cover for highbrow coercion.

Wonks: "I thought Kahneman, Tversky and Ariely were the prototypical behavioral economists. All of them have backgrounds principally in psychology rather than economics."

And Richard Thaler, too. Yes, it would have been more accurate to say "done by economists **and/or** published in economics journals."

So when Kahneman publishes in a psych journal that's econ psychology, when he publishes in an econ journal, that's behavioural economics?

Honestly, I'm struggling to figure out the difference...

On Stephen's point: not sure experiments allow for model agnosticism. It's more a system of keeping everyone honest. Experiments and models kinda go hand-in-hand. Usually you do experiments to test the predictions of your models. It's rare to do experiments for their own sake (though obviously it did and does happen - especially in areas where we really know very little).

Isn't behavioural economics 'controversial' precisely because it goes into the world and finds that many of the predictions of standard econ models don't predict what actually happens in reality? And that makes some economists uncomfortable.

And if one is a prescriptive economist, finding that reality rejects your deeply held axiomatic system of rules for right living ... Ouch.

Standard econ is also potentially cover for coercion if it's used prescriptively. Nothing new there.

Isn't BE's point that people will still choose to eat the high-calorie dessert even if they are fully aware of and understand all the bad consequences?

I suppose you can set in contrast to standard econ rationality, and say it's 'bad'. Or you can update your models of the world to reflect the fact the people really do behave this way...


Tracy W: "What right, in other words, does a psychologist, or any other 'ist have to decide for me that my happiness is more important than my choices?"

My 13-year old judges that a $20 pair of sneakers is worth $100 because there is a worthless "swoosh" on the side. This preference is conditioned by billions of dollars of ad spending, without which, he would *choose* to pay $20 for a pair without the swoosh.  And don't tell me that he's better off for reasons of improved signalling of mating prowess, or whatever.  That's a zero sum game, so no improvement in DWL. Along with some other sectors, the marketing industry is really nothing but DWL (It's worse than dead weight loss in fact - for example we probably consume the *wrong* drugs because of marketing).

So the problem is not that we need be more respectful of peoples subjective preferences.  The problem is that those preferences are, objectively speaking, stupid.

As a Engineering grad, I have a different perspective than an economist. I think it's one of the points of friction between Frances and myself. I'm a trained model-breaker. When I see a model, my first reaction is to hit it with a hammer. I want to smash it. Why? Because that tells me how robust it is, what inputs I can feed it to get the behaviour I want rather than behaviour that is uncontrolled and dangerous.

To me Economists rely far too much on deduction and model authority. If it comes from the model, it must be authoritative. Engineers do not trust models that can't be verified and have defined limits put on their input for stability. Our job is to separate the useful input from the dangerous.

The Economist's mind sees the world a logical place. The Engineering mind accepts that the world is illogical but tries to make it logical, just a little bit and tries to warn everyone about the boundaries and limits of that effort. As a result we are far more comfortable with throwing out a discredited model and getting a new one that works.

It results in an iterative design process but that's how most design works in real life. It has to. To me it seems that Economists are much more uncomfortable with being iterative.

Patrick "Isn't BE's point that people will still choose to eat the high-calorie dessert even if they are fully aware of and understand all the bad consequences?"

One of the most valuable things I've learned from BE is that if I put cookies in an opaque container I'm less likely to eat them. Clear glass containers should only be used for healthy foods like carrots.

This can be embedded in some kind of model of meta-preferences, where people choose what kind of containers to put their food in - a variant on the bounded-rationality-as-a-rational-strategy approach of Herbert Simon and followers. I don't see this as being so much a part of the modern BE agenda, but quite likely people are doing research in this area that I'm not aware of.

K: "The problem is that those preferences are, objectively speaking, stupid." - I'm torn - yes, I agree with you on the stupidity of spending huge amounts of money for swooshes, but at the same time my inner economist is always there quietly saying "people aren't stupid. respect people's choices whatever they happen to be."

K - you have the right to decide for your son because you're his parent. But he's going to turn 18, and then I understand that as a matter of law you lose that right.
I believe in freedom of speech, and freedom of thought, so I'm totally okay with you not respecting other people's subjective preferences. But I believe in freedom of speech for *everyone*, you're free to disrespect other people's subjective preferences, and they're free to disrespect you for disrespecting their preferences, or for any other reason they care to apply, and so forth.
To take your last point, "these preferences are, objectively speaking, stupid", well, fine, but if my preferences are, objectively speaking, stupid, how can I decide whether a pyschologist, or any other 'ist, is smarter than me, and thus competent to decide such matters for me, or for other people? If I'm not competent to make decisions for myself, I'm certainly not competent to make decisions about who should be making decisions for me, or anyone else. To put it another way, for all I know, all those psychologists and behavioural economists that Francis Woolley cites might as well be the moral equivalent of Nigerian email scammers and thus objectively speaking the worst thing I could possibly do for myself is to defer to their judgements. And the more that the psychologists or other 'ists argue that people like me are irrational, and the more data they provide to support their hypothesis, the less confident I am that I should be drawing any conclusions based on their research at all.

Greg Ransom, there are experiments in evolutionary biology. Principally drosophilia, but also nematodes and even Russian silver foxes.

Tracy W : There's not getting away from making a value judgement. One could ask "what's so great about freedom of speech?" - and plenty of places in the world do (e.g. China - the producer of swooshes). Do you think the marketer who is trying to get your money by tricking you to change your preferences is respecting your freedom?

I dunno (honestly). If you feel better after you've been tricked and spent the money, even knowing you've been tricked then who am I to pronoun otherwise?

"As a Engineering grad, I have a different perspective than an economist. I think it's one of the points of friction between Frances and myself. I'm a trained model-breaker. When I see a model, my first reaction is to hit it with a hammer. I want to smash it. Why? Because that tells me how robust it is, what inputs I can feed it to get the behaviour I want rather than behaviour that is uncontrolled and dangerous."

If you've ever been to a PhD seminar in economics, that's all it is - one person presenting a model and a dozen people swinging hammers at it.

Yes, exactly. Non-economists who visit our seminars are sometimes shocked at how stormy things can get. I understand that at the Chicago econ dept, it's considered to be a major achievement if the presenter can get past the first slide.

O/T: The Russian silver fox study is fascinating. I'd recommend reading up on it.

Patrick, but if the scientists are right, how can I trust them when they tell me that I'm being tricked by a marketer?
Consider some of the other possibilities that could explain the scientific results Frances describes (note, by "normal" I am referring to people with functional brains of the sort that psychologists and the like do this sort of research on, as opposed to people in a coma or living in remote villages that have never been contacted by scientists or the like):
- Marketers only are interested in tricking CEOs and other such people who pay marketers. They are nefariously taking advantage of scientists' natural human irrationality to get them to publish research falsely indicating that normal people's preferences are set by marketers. The scientists honestly believe that their research is correct.
- Marketers and scientists, being normal people, are irrational. The marketers irrationally but honestly believe that they can influence normal people's preferences, and the scientists irrationally but honestly come to the conclusion that marketers can do so, even though objectively the marketers have no effect.
- Scientists are evil, and have set out to take advantage of normal people, by publishing this sort of research. You, James Woolley and I are too dumb and/or irrational to figure out what their end objective is, or another possibility is that I'm too dumb, and you and James Woolley are nefariously in on the plot.
- Scientists keep publishing research indicating that people aren't influenced by marketers, but I am so irrational that I keep reading it, and summaries of it, as indicating that we are.

The more convincing the research that people like me make decisions irrationally, the less I think I can trust said research, or indeed anything else that goes on in my brain.

As for respecting freedom of speech, the best arguments I've seen for this are in chapter 2 of J.S. Mill's "On Liberty". But hey, if I'm irrational, I could be totally wrong about the value of J.S. Mill's arguments, and I could be totally wrong in whatever I think about the marketer you refer to. (To be honest, your question on this point and on the tricked one, sound to me like loaded questions along the lines of the infamous "have you stopped beating your wife?", as I can't see that I expressed any opinions relevant to the presuppositions contained in said questions.)

I have always found BE to be the foil to regular economic models as it highlights examples where the regular models don't work. As Shangwen points out, it is too simple to say "asymmetric information" or "monopoly power" and look solely at the Industrial Org text books. People choose to do things that inevitably mess up theories.

Newtonian theories work incredibly well almost all the time. When they don't work they are wrong. Fortunately for physics, Newtonian formulas are a special case of more general equations. Maybe in economics there is no General Formula that covers all situations. Maybe there are categories where in different situations the tools need to be completely different. I can use my toolbox to work on my clothes but my wife's sewing kit is much more helpful. But don't use the sewing kit to install a new plug...

One of the brain teasers I struggle with is why do only business students cheat at Prisoner's Dillema? Everybody else cooperates and achieves the group optimal result - the commerce, econ, & MBA students cheat (or act in their "own" best interest depending on your perspective) and ruin it for everybody. So who is making the "bad" decision - and why?

K: the swoosh is valueles. But Joe Bain, father of industrial economics once said( IIRC from memory)" From a use of resources pov, we should all wear Mao suits size 40. Yet we don't".
A fashionista is someone who is like everyone before anyone is like her. And when everyone is like her, she no longer is.
The Roman empire was probably expanded by senators coming home and having their teen-age daughter telling him that "Calpurnia has a new red toga and a Greek cithar-playing slave and I only have last year blue one and a Thracian flute player. I hate you!." He give her a bag of sesterces and go find calm battling some germanic tribes.
Preferences are there and are our constraints.
And no I don't believe in the power of marketing. The two big lies in marketing are the same one from both practitionner and opponents: that marketers have a lasting influence. If they had,our backyards would filled with whatever is sold by the best ad agency.

Peter McClung: "One of the brain teasers I struggle with is why do only business students cheat at Prisoner's Dillema? Everybody else cooperates and achieves the group optimal result - the commerce, econ, & MBA students cheat (or act in their "own" best interest depending on your perspective) and ruin it for everybody."

What's odd, though, if that if you get 10 or 15 economists together for dinner at some conference, hand around the total bill and ask everybody to pitch in, there will almost always be a large surplus. So does that mean we don't free ride, or that we're more concerned about status, waiting until everyone is watching and then throwing in a $50 or a pile of $20s, than about free riding?

Somehow the explanations offered by BE often seem hollow...like all those evolutionary psychology theories that bring everything down to mate selection. Should there be Anthropological economics too? I like this address given by Mark Chaves, an anthropologist and president of the Scientific Study of Religion.

Here he is talking about puzzling inconsistencies in religious behavior, or "religious congruence". In it, he tells the story of a tribal shaman who is asked by an anthropologist if he is going to perform a rain dance, because the tribe is experiencing drought. The shaman answers, "Don't be a fool, whoever makes a rain-making ceremony in the dry season?"

Frances - your comment about dinner reminds me of my undergrad days when a fellow who had literally escaped Nigeria as a communist and showed up on campus. It was before my time so I do not know the precise details but he went to the Marxist economists and asked for help. They effectively turned him away (as I say, I'm not sure of the precise details but they had no practical help for him). He came across the curmudgeonly classical economist and in desperation also asked him for help. In contrast, the free-market advocate invited him home to live until he could get himself sorted out.

Somewhat off-topic, but I never understood why loss aversion was seen to be such a great insight. If marginal utility is declining, then we'd expect people to prefer avoiding a $100 loss over the prospect of gaining $100. It's just garden-variety risk aversion, isn't it?

Frances, Peter: I highly recommend a textbook by Samuel Bowles ‘Microeconomics: Behavior, Institutions, and Evolution’. In it he shows how we can incorporate behavioural and evolutionary game theory to explain a ‘cooperate’ solution in social settings e.g. sharing bill for dinner. Nothing ground breaking as I found out there’s in fact a lot of literature on this stuff but Samuel Bowles textbook was first time I encountered it. There is a lot of good stuff in there incorporating eclectic theory such as behavioural and evolutionary game theory and applying it in a political economy setting that I never imagined existed until I came across it in that book.

I think it’s important to make a distinction between positive and normative economics. Sure economists have models about utility maximisation etc. but that doesn’t mean that they should act like the actors in their models or that’s how they think people should act so I don’t see any inconsistency between showing altruism and generosity in social settings and assuming that individuals are self-interested in the models. The latter is about explaining phenomena that may be observed while the former is a value judgment on how they should lead their lives.

On a related point I think it’s also important to define ‘rationality’ really carefully. Anecdotally at least I think people get into needless arguments about economic models because they are arguing about different things.

Stephen, "It's just garden-variety risk aversion, isn't it?" I think what's different is that there's a kink, and the kink moves around. So if you start out at $1000, then you get really upset about going down to $900, but if you were at $900 to begin with, then you're only moderately thrilled about going up to $1000.

Garden variety risk aversion, on the other hand, gives the same absolutely value change in utility whether you're going from $900 to $1000 or from $1000 to $900.

DavidN - thanks, I like Sam Bowles' work.

Peter, interesting story.

What is it with all the economists named Woolley on this thread?

Are they some sort of clan who all chose to be economists?

Tracy W: Ask the marketer. It's no secret that they are trying to convince to do something you wouldn't otherwise do by means other than presenting information. Thus scantily clab hotties in beer commercials rather than IBU and SRM numbers.

Along comes the 'ist telling why the scantily clad women increase beer sales.

What effect does that have on liberty?

Stephen,

You may be interested in this paper:

http://faculty.som.yale.edu/keithchen/negot.%20papers/Rabin_EasyCalibrationTh00.pdf

Basically, the argument is that if diminishing marginal utility was the source of risk aversion, then everyone would accept a positive payoff bet provided that the stakes were small enough.

But in studies, people with a net-worth of, say, $500,000 will still not accept a bet in which they lose $1 on heads and gain $1.05 on tails. That implies implausible utility functions.

And moreover as roughly the same proportion of households turn down the bets (independent of their wealth level), there must be something else going on behind risk aversion, other than just diminishing marginal utility of wealth.


Well, economics could do what other disciplines dealing with very complex systems do - model some basic elements, test them, do some experiments, gather data, add some more elements, test again, stop every so often to check the whole for coherence, map and state as clearly as possible the current limits of knowledge. And match the process to the degree of change in the systems (eg, military theory, in which every solution generates new problems, is much more ad hoc than, say, climatology). So take BE seriously, and stop de-funding economic history. An alternative is to stick with arguing about slightly different basics for another century or so. The latter clearly pays better.

Not to quibble, but Psychological Review and Personality and Social Psychology Review (both listed on the top journals list you linked to) are exclusively theory journals. I suspect a number of others are as well.

There's more to psychology than the empirical novelty acts that get published in Psychological Science.

It seems lazy to dismiss the conceptual basis for an entire discipline based on the methodology of searching for the word 'theory' in a list of journals.

Shangwen on September 01, 2011 at 01:10 PM: Your colleagues' trial wasn't a failure! They tried an intervention to shape patient behavior, and Nature gave them a clear result. The world's store of knowledge gained an increment - we know one intervention that won't work. We move on and try something else. But Frances is right - 'Once you fall down the rabbit hole, you just have to keep on going'. Don't expect theory to be much help. Gather as much data as you can about the particulars of this problem. It seems patients make their own decisions when to exit rehab, so well-designed structured interviews could help your colleagues understand how patients decide, and what information (and, yes, incentives) might influence those decisions.
Determinant reminds us that engineering is iterative. The engineering of behavior is no exception, in fact it is more so. (It happens to be my profession, under the name of human-factors engineering or engineering psychology - my degree is in experimental psychology). And it is necessarily highly empirical - practicioners spend a great deal of time in data collection in field studies, part-task experiments, low- and high-fidelity 'human-in-the-loop' simulations, and in interviewing, conducting surveys, etc., amassing the facts that Frances finds boring. Maybe not elegant, but we have our successes.

Patrick - I think in your attempts to get me to talk about, or to, marketers, you are trying to avoid the implications of my basic point - that the more we believe the scientists' evidence that we make decisions irrationally, the more we should be very doubtful about said evidence.

(Although what do I know? Perhaps you and James are really trading recipes for dandelion wine and I'm just irrationally thinking it's a debate about the implications of psychology and behavioural economics and the like).

Tracy W - who is this James person?

Ken - " amassing the facts that Frances finds boring"

Don't get me wrong - this stuff sells. I wrote up some of that labelling effect research in my globe and mail column and got a lot of traffic.

The nudges blog is fun to read, as is a lot of this behavioural economics research.

But for me, personally, there's a kind of intellectual play that you get from econ modelling - it's what makes economists draw curves on napkins or use the salt, pepper, and any other objects on the table to explain a model of trade flows. And I don't get that from BE.

Bork - fair cop.

Actually, no, engineers and scientists are /much/ more respectful of models than economists. Go to an economics presentation and a significant percent of the time is people trying to break, discount, or demolish the model.

Joshua: "I would hope that most people see that the very notion of an optimal amount of tennis to play that doesn't put the individual's preferences at the center of it all is strange, maybe even disturbing."

Frankly, I find the notion of an optimal amount of tennis to play rather strange. ;)

You can make assumptions that will let you define and find an optimal amount of tennis to play, but then it is contingent upon those assumptions.

Frances - blush. At least I have provided some supporting evidence for my doubts about my own intelligence and rationality. :)

Tracy W.: " the more we believe the scientists' evidence that we make decisions irrationally, the more we should be very doubtful about said evidence."

One problem is that the argument is too coarse grained. Scientists do not simply show that people are irrational. They show how they are irrational. Furthermore, to show that people are irrational, the scientists have to show what is rational, and that means that the scientists and their audience have to be rational. There is no circularity.

Frances Woolley:"What's odd, though, if that if you get 10 or 15 economists together for dinner at some conference, hand around the total bill and ask everybody to pitch in, there will almost always be a large surplus. So does that mean we don't free ride, or that we're more concerned about status, waiting until everyone is watching and then throwing in a $50 or a pile of $20s, than about free riding?"

I noticed a similar phenomenon with a different group some years ago, when I put the dinner bill on my credit card. I don't think that status was a factor, because nobody was looking at what other people were paying, or at how much others' dinner had cost. I pointed out that we had too much money, but nobody asked for any back. So I left a huge tip. ;)

I have also noticed that some groups are quite precise about what their own dinner cost, and how much they want to contribute to the tip. Other groups avoid a surplus, but have a norm of equal shares.

Bork - apology retracted. I've just spent some time reading through a few papers in Personality and Social Psychology Review, which you describe as an "exclusively theory" journal. Those papers are still very empirically grounded, very inductive - not at all like the "let's take a set of assumptions and see what we can derive from them" deductive papers that you find in econ theory.

The better example, though, is what is taught in intro courses. Which does each course begin with? Econ 1000 begins with basic models, and psyc 1000?

Peter: "One of the brain teasers I struggle with is why do only business students cheat at Prisoner's Dillema? Everybody else cooperates and achieves the group optimal result - the commerce, econ, & MBA students cheat (or act in their "own" best interest depending on your perspective) and ruin it for everybody. So who is making the "bad" decision - and why?"

As I recall, the commerce, econ, and MBA students have been taught to cheat. Naive students tend to cooperate in classroom experiments. (Yes, they are cooperating with strangers, but with people that they can identify with.) Now, evolution, biological or social, may explain the tendency to cooperate, but there is also a rational argument, which Kant might have used. Because of the symmetry of the payoffs, if there is a correct strategy, it is the same for each "prisoner". Among the symmetrical strategies, cooperation is best.

The analytical problem lies in reasoning by cases. Reasoning by cases nearly always works, and seems to be so obviously rational. But it may fail when there are interactive effects. The analysis of each case assumes that you can hold everything else constant, which may not be true. Reasoning by cases also fails with quantum mechanics.

Pete Lunn sent these thoughtful comments via email:

An additional thought for you:

Nudge is a decent attempt at a purple pill. It effectively combines the two approaches (BE and welfare economics) by identifying situations where welfare analysis remains possible but behavioural economics helps to move people towards optimality. The kinds of scenarios are: we designate people's long-term preferences as their true preferences (policy to assist people to save, not overeat, etc.), the optimisation problem is too complex for them to solve (choosing a care plan or a portfolio), or the social optimum is non-controversial (policy to price in externalities like pollution). The regularities uncovered by behavioural economics help us to nudge people towards behaving according to their true preferences, solving complex optimisations, or pricing in externalities for little cost. But behind all of this is standard welfare economics and the goal is still to behave optimally according to standard theory.

This is all very clever and Nudge is consequently having a big impact. BUT, as you rightly point out, once you accept the behavioural findings, it is far from clear that we can define people's true preferences or reduce situations to the pursuit of non-controversial optima. Hence, the applicability of Nudge-type solutions is probably rather limited, ironically enough by the findings of behavioural economics.

Pete Lunn.

"... that the more we believe the scientists' evidence that we make decisions irrationally, the more we should be very doubtful about said evidence"

I don't think that evidence of irrationality deserves special skepticism above and beyond what one ought to apply to all evidence of any kind.

I get the sense that you are worried about policy prescriptions to force people to be 'rational'. Fair enough. But we still live in a democracy. In principle, I see no reason why it would be illegitimate for people to choose to implement policies that force them to be 'rational' knowing that they just won't be able to resist the cookies in the clear container.

Frances Woolley: "Economics, [Pete Lunn] said, is basically a deductive discipline. Psychology, on the other hand, is inductive.

"It's a caricature, a gross over-simplification. But it has an element of truth."

Induction is making a comeback. ;) Largely, perhaps, because machine learning has demonstrated its efficacy. To call psychology inductive 50 years ago would, I think, have been heresy. The hypothetico-deductive method reigned supreme.

Here is another caricature, with perhaps some truthiness. Economics is scholastic, psychology is empirical. (At least, scientific psychology is empirical. ;))

Now, I have read enough to know that economics is not scholasticism, but it still seems weak in empiricism. For instance, take Ricardian Equivalence.

Perhaps I am missing something, but here is the argument, as I understand it. Gov't stimulus will not work because present deficit spending must be paid for by future taxes. Therefore, rational economic actors will not spend the stimulus money but will save it in order to pay those future taxes (or for their descendants to do so), thus defeating the stimulus.

Why is that argument not laughed out of court? First, when have gov'ts paid off their debt instead of rolling it over? (I have heard that Adam Smith pointed that out.) Andrew Jackson did so in 1835, but that may have been a mistake. Where is the necessity to save against future taxes? Second, even if rational actors would save against future taxes if they could, they have to be able to afford do so. Why then, is this an argument against a stimulus per se, instead of an argument for a stimulus targeted at poor people, who would not be able to save the stimulus money, or who would not expect much in the way of future taxes? The Ricardian Equivalence argument seems to fail what Freud called reality testing. (OC, there are other counter-arguments, but they accord the argument more respect. Why does it get any respect at all?)

@Ken Schulz, Sept 2, 2:03 a.m. (get some sleep, people!):

I would classify it as a failure in that it did not yield a result that the designers strongly believed would happen, but you are certainly that it revealed information (though I wouldn't qualify as "new" the revelation that people over-consume health care).

I haven't read Nudge, but I have read the UK Govt's report on introducing nudgism into health policy. I get the point that there may be empirical evidence to support the effectiveness, but so what?

What disturbs me about this is that all the nudge policies are aimed at reducing the presumed costs to the government of various individual behaviors. The UK, like Canada, is stuck with a bloated, inefficient health care system that redistributes the cost of treating illness across the population, in addition to similar policies for the economic burden of illness...and as a result residents of the UK now have to put up with more intrusive policies? Looking at this report, I think the nudge enthusiasts are like David Suzuki: they don't know what an externality is. Pollution is an externality. Joint pain and shortness of breath because you are obese and smoke are not externalities; they are your problem, and you can do something about them. Socializing the cost of treating those problems does not convert them into externalities.

I get that there may be much theoretical value to the whole behavioral economics discipline. What I distrust is the explosion of elite enthusiasm there has been for a very new idea. I think it's great if policies can be designed and publicly sold as experiments, but I don't think that's the case with BE-based policies.

Min: Ricardian equivalence is a bad example because it's been critiqued to death by economists (see wiki page on RE). Also RE doesn't depend on government completely paying off debt as increased debt means bigger interest payments (irrespective of whether govt. plans to rollover or pay off) which is paid off through bigger taxes.

More generally, based on your last comment, I think you underestimate economists ability to critique themselves. As already alluded to by some comments economists can be pretty harsh on their own colleagues. I'm also not sure how you can say economics is weak empirically. I agree if you mean economics is weak in using experiments but weak empirically relative to what and by what measure?

Totally ignorant comment here, but nevertheless....

I thought the idea of universal health care was over basic health care. By that I mean you go to doc periodically for a check up. Don't pass check up go to next step in, it is hoped, eventual remedy. And so forth.

Where in this sequence is there an ability to consume without limit? If you demand an additional check up and you're found to be OK, you pay for that check up. If you don't pass the check up and need to go to next step, it's paid for under universal health care. If a MD has an unusually high check up frequency per patient, it's a red flag and regulators will give that doc a check up.

The key here is you are discouraged from using unnecessary health care, and docs are discouraged from providing unnecessary health care. It's not perfect of course and subject to abuse just like everything else in God's world. But the assumption that everyone will demand health care services without limit seems sketchy.

Min: "Furthermore, to show that people are irrational, the scientists have to show what is rational, and that means that the scientists and their audience have to be rational. "

No, all the scientists have to do is to convince themselves, and their audience, that they have shown what is rational.

Patrick: I agree with you that evidence of irrationality doesn't deserve any special skepticism. And in fact, my problems come from the fact that I am inclined to accept it as being right (and, on top of that, my inability to think of any compelling reason why said evidence should not be applied to itself). If I thought that the scientists just had gotten this research wrong, like homeopathists, I at least would be saved these doubts about my own rationality.

I agree with you that there's no problem in principle why it would be illegitimate for people to chose to implement policies that force them to be 'rational', such as Frances Woolley putting cookies in the opaque container. Where I do see the illegitimacy is in deciding to implement policies for other people to force them to be 'rational', as the people doing the forcing are apparently as likely to be irrational as the people being forced.

Tracy W:  "you have the right to decide for your son because you're his parent. But he's going to turn 18, and then I understand that as a matter of law you lose that right."

I didn't say he wasn't free to buy the sneakers with his own money. And I'll admit, the principal stupidity is not the purchase of the sneakers. It's the recognition of trademarks as property which rigs the game in favour of a market failure (80% gross margin). It's a prisoner's dilemma in that we would all be much better off if no one bought swooshes, but then there'd be big individual gains from defaulting. Once we permit the game to be played (by enforcing trademarks), then it could possibly be rational behaviour. But it *is* collective stupidity.

"how can I decide whether a pyschologist, or any other 'ist, is smarter than me, and thus competent to decide such matters for me, or for other people?"

You don't have to. You just have to understand how the market place scientific ideas operates. The case for an inefficient competitive equilibrium in academic research (unlike the case for the market for swooshes) is pretty hard to make.  The principal consumers of that research are other academics, who generally

1) are extremely well informed and
2) have a strong *economic* interest in contesting and disproving the published results of others (that's how careers are made).

The more significant and loudly proclaimed the result, the faster and more thoroughly it will be challenged and (if necessary) debunked (c.f. cold fusion).

If you think that a believing in science is equivalent to accepting any random idea on authority, I don't think you have thought about how science functions.  Mistakes, and even deliberate falsehoods, can occur but they cannot be sustained. This is clearly not the case for swooshes.

beezer: "Where in this sequence is there an ability to consume without limit?"

There isn't.  Frances' claim (as I see it) is that if you were given your current health care consumption as a cash grant instead, you'd consume less healthcare and allocate more elsewhere because the *marginal* cost of healthcare consumption is no longer zero.  I think it's uncontroversial.

"beezer: 'Where in this sequence is there an ability to consume without limit?'

"K: There isn't"

There kind of is (K, I realize you are referring to a model, whereas I am referring to behavior under certain policy conditions). Of course consumption is not truly limitless, but for services that are not strictly subject to gate-keeping and full-on rationing, it is quite easy to consume far beyond your marginal medically-necessary benefit, if you exclude from "benefit" the utility of things like consolation, getting attention, and the signalling value of certain types of consumption (i.e., "I'm in therapy."). You can't get a liver transplant just because you feel like, but you can get (on the public dime) many times the cost of a transplant in outpatient services that offer you no benefit. Even in your country, beezer (I assume from your blog that you're in the US), consumption with high DWL is very common.

So, in a situation of such gross inefficiency (e.g., excess profits, bloated wages and fees, consumer time wasted on needless consumption), one would hope that BE offered us something...but I think it does not. On the other hand, I'm not a full-on economist and there are nuances about Frances's post that are beyond me.

"Where I do see the illegitimacy is in deciding to implement policies for other people to force them to be 'rational'"

To what extent is this sort of objections based on fear of the prospect of being forced to not do things you'd rather continue doing?

Trite example: very few people complain about speed limits being oppressive because speeding imposes all sorts of negative consequences on people other than the speeder. What about overeating, or not exercising, or smoking in a country with publicly funded health care? Someone else's irrational preferences costs the rest of us money. So who wins? Do we dump universal tax funded health care, or does the state use its power to coerce people to behave differently?

I think it's perfectly legitimate to democratically decide that, in return for the benefit of public health care, people give-up some freedom and have some responsibility imposed on them. Of course, people might choose the opposite and though I'd disagree with the choice, it's still legitimate.

DavidN: "More generally, based on your last comment, I think you underestimate economists ability to critique themselves."

Perhaps so. I usually say that I am referring to public discourse, but omitted to say that this time.

DavinN: "As already alluded to by some comments economists can be pretty harsh on their own colleagues."

What surprised me about Ricardian Equivalence was first, that the argument was entertained, and second, the lack of public debunking. As I recall, DeLong made an argument along the lines that only part of the current stimulus had to be saved for future taxes, but did not make any empirical refutation. His is one of the counter-arguments that I had in mind as showing some respect for RE.

It is not whether economists argue or fight with each other, but the apparent lack of empiricism that I was commenting on.

I'm coming in a bit late here, but I'd like to say this has brought me to a new realization.
I've been suspicious, if not downright disbelieving, of the assumptions typically made in economics for some time. But Frances Woolley has brought home to me a whole other dimension of the problem.
That is, I've generally taken the position that if economists are working from false assumptions (perfect information, false ideas about human psychology/behaviour, decreasing returns to scale, basing theory on "utility" but then acting as if dollars make an adequate proxy for "utility", etc.) then they will be wrong about the kinds of policies that will give us an optimum economy, and an alternative theory that had correct assumptions would give us correct answers.
But the problem is rather that if you conclude people's preferences are in various ways not perfect, you cannot use them as the basis for what makes an economy optimum. The whole question of what makes a "good" economy in the first place becomes open.

That seems like a big problem. In a way it is, but only because economics has for a few decades now suffered from wanting to be physics (and 19th century deterministic no-chaos, no-quantum physics at that), which it isn't and cannot be any more than, say, anthropology can be. Once you step back from the idea that the optimum economy is determined by people's preferences taken as a given, which is circular, tautological, and ignores various processes by which preferences are formed and changed--once you abandon that, you are left where we used to be: Realizing that the question of what kind of economy would be best is a political one.
(It can be argued that one reason economics ended up like this is precisely an attempt to dress up one political consensus as scientific and inevitable)

Time to stop calling it "economics" and go back to calling it "political economy".

Secondarily, I would think that economics can still determine things without making claims about what's best. That is, if you use real-world assumptions rather than false ones you can with some accuracy describe the kinds of economic results that would result from different policies, including ones that manipulate preferences, and compare and contrast these results, while trying in somewhat the manner of an ethnographer not to prejudge which sort of result a social/political process ought to be choosing, since that's really up to people.

There are experiments at the edges -- even Darwin conducted experiments on some of the sub-processes, i.e. the transport of seeds and roots across the ocean.

But note well, this stuff is adaptation -- only one part of the explanatory mechanism -- it is not speciation, made thing explained by Darwin.

Someone wrote,

"Greg Ransom, there are experiments in evolutionary biology. Principally drosophilia, but also nematodes and even Russian silver foxes."

Mankiw defines 'economics': the study of how society manages its scarce resources.

Is economics the study of the tradeoffs people face in managing resources or the decisions people make when confronted by these tradeoffs? The latter to me seems to be a historical/psychological (empirical) question, whereas the former seems to me to be a logical (deductive) question. The difficult truth, I think, is that Mankiw is right and economics deals with both: to understand how resources are managed is both a logical and historical/psychological question.

Purple Library Guy,

If it's inappropriate for economists to ape physicists, then why is it a problem that they have (in many cases) been aping 19th century physicists rather than 20th/21rst century physicists? Philip Mirkowski has been wrestling with that problem for decades. He is not yet the victor.

The key fact in all this is that justifications and explanations end somewhere, and the 19th century philosopher's categories of "induction" and "deduction" do not capture these end points, as Wittgenstein, Popper, Hayek, Kuhn and others showed us decades ago.

What is a "modern" economist?

An academic following the defunct dictates of some 19th century philosopher ...

Let's put a big red bow on this central point:

The procedures of "induction" and "deduction" fail to characterize or capture the nature of empirical science, most especially complex causal explanatory sciences like Darwinian biology.

The procedures of "induction" and "deduction" as applied to "science" were dictates invented by philosophers -- like Carnap and Mill -- and the great result of work over the last 100 years is to completely reject that picture of "science" and knowledge, e.g. see the work of Kuhn, Wittgenstein, Hayek, Popper, etc., etc.

When will tenured economists be told the news ...

Ironically, economist Carl Menger was one of the first to get some of the central points against the "induction" and "deduction" picture later made by Popper, Hayek, and even Wittgenstein and Kuhn.

But economists don't know anything of this work.

Found it. I remember coming across a blog post on behavioural economics, but couldn't remember where. It's here, by Jeff Smith:

I am of several minds (pun fully intended) about behavioral economics. First, the name irritates me; all economics is properly about behavior. Second, I think some of theoretical work that transpires under the heading of behavioral economics, such as the development of new choice axioms, is largely wheel-spinning. Third, I think that in some quarters behavioral economics has induced a sort of looseness of thought. Instead of thinking very hard about a phenomenon in order to come up with a non-obvious rational choice explanation, someone simply blurts out "framing" or "hyperbolic discounting" and the thinking stops there. Fourth, it irritates me when people equate rational behavior with an assumption of costless information processing. It seems to me that the correct way to proceed is to incorporate a cognitive budget constraint into the optimization problem. It is hardly rational to spend huge amounts of costly cognitive resources to solve some problem when a quick, cheap but slightly wrong heuristic is available Our models should reflect this and, more broadly, we should not treat clearly irrational behavior as the benchmark of rationality. This requires learning a bit of psychology and/or neuroscience in order to get the budget constraint right. Fifth, I think that people who dismiss the entire behavioral economic enterprise ("wackonomics") based on the failings of some of its practitioners are being careless and making a serious mistake. There is important, policy relevant behavior to be explained that does not fit will with traditional models that assume costless information processing. I think economists have much to add in coming up with new and useful explanations of these behaviors.

Mr. Gordon, this bit of your quotation from Mr. Smith strikes me as odd:
"Third, I think that in some quarters behavioral economics has induced a sort of looseness of thought. Instead of thinking very hard about a phenomenon in order to come up with a non-obvious rational choice explanation . . . "

As far as I know, the "rational choice" axiom was never first a hypothesis. It was never tested, never adopted because of some solid reason to believe it was true. Rather, it was used because it seemed reasonable to someone at the time and because it made the math easier. I find it hard to see where "thinking very hard" to come up with ways to salvage the rational choice "explanation" for any given situation represents non-looseness of thought. If there were some reason to prefer the rational choice explanation to any other (beyond convenience and tradition), then readily abandoning it might represent "looseness of thought", but as far as I know there is no such reason.

Purple Library Guy: "I find it hard to see where "thinking very hard" to come up with ways to salvage the rational choice "explanation" for any given situation represents non-looseness of thought."

Once, in physics lab, an experiment seemed to violate Ohm's Law. As part of our homework we were asked to explain why it did not. My explanation was to rewrite Ohm's Law. ;) Needless to say, my explanation gave no physical insight. I thought that it was clever, but I think that Smith could call it looseness of thought.

If rational choice is the default assumption, even though it will at times be violated, then seeking to preserve it if possible is parsimonious and desirable. To shrug your shoulders and say, oh, well, here is another case where it is violated weakens the theory.

OTOH, psychologists have good reason to believe that most humans are capable of only limited rationality. If that is your starting point, then to assume a violation of rationality **that is predictable** is not looseness of thought, but adherence to a different theory.

Min: 'What surprised me about Ricardian Equivalence was first, that the argument was entertained, and second, the lack of public debunking. As I recall, DeLong made an argument along the lines that only part of the current stimulus had to be saved for future taxes, but did not make any empirical refutation. His is one of the counter-arguments that I had in mind as showing some respect for RE.’

With respect I don’t think the economics blogosphere (probably more apt to call it the politics blogosphere) is representative of the wider academic economics community and personally I think it’s a terrible sample to make generalisations about the wider discipline from. With respect to empiricism within the economics I think it would be hard to mount a case that it’s weak. Anecdotally at least, I find it’s dominant if not dominates the discipline.

Um, yes. Ricardian equivalence has been put through the academic wringer. The basic point is correct, but the conditions required to get pure Ricardian equivalence don't hold.

Purple Library Guy: Positive economics doesn’t tell us what is ‘optimal’ per se. Positive economics can tell us what is Pareto optimal, what’s a stable and unique equilibrium, which equilibrium minimise dead weight loss etc. but it’s politicians and economists who enter the political fray who weigh the competing results and then according to their own values use economic theory as rhetoric to fit their political narrative which ultimately is not science but value judgements so I think your criticising of economists proclaiming policies which are ‘optimal’ is better directed at politicians and economists who practice politics than the discipline per se.

Also I think you need to make a more substantive set of arguments on why you find rational choice theory or other assumptions are false and unrealistic and therefore the results that flow are wrong. How do you judge whether an assumption is good or bad, and realistic or not?

DavidN - Just to get this straight, are you arguing that the statement "this equilibrium minimizes the deadweight loss" is a purely positive statement?

As an outsider let me say that BE is really fun to read. And not just because Ariely writes well - it doesn't hurt, but that is not all. BE helps me use my rational brain to make decisions based on my irrationality.

I save at a higher rate using the account my financial advisor set up that I can't access without asking his admin for help. I can cheat and dip in but I don't because it's hard. The savings account linked on my RBC website was useless. I could too easily "borrow" from my savings.

There are phenomena that need to be understood and policies shaped around them. I do not like to be coercive but it makes sense to me that 401Ks in the US be put by default into a mixed account with equities and bonds instead of a savings account. Let people choose, but choose the default sensibly.

Driver's licenses should come with a default organ donation.
Many small purchases over time tend to bring more satisfaction than a big one.

It seems to me that BE is trying to understand how individuals really are, rather than how they should be.

But BE is not going to tell me that there is a serious aggregate demand problem or what to do about debts or what to do with credit default swaps or why the merger of AOL and Time Warner was a disaster.

Frances: I think it is if you use it as a description but not if you use it as a criteria of what is 'optimal' (in the non-techical sense) which then in my opinion it becomes political rhetoric. It might be semantic but I think it's an important distinction.

Chris J "As an outsider let me say that BE is really fun to read"

And as an insider, too. As Pete Lunn said in that comment I quoted earlier, Nudges might be as close as we're likely to get to a purple pill, that incorporates the insights of behavioural econ and still keeps the power of more conventional econ.

I use those BE things, too - hiding cookies from myself etc. But I do think it is much more challenging of the mainstream econ paradigm than some might like to think.

DavidN - so economists get up, tell their students "free trade is Pareto optimal" or "free trade is optimal" (because it's tedious to keep on saying Pareto) this shouldn't be taken to mean to mean that we're advocating free trade?

Frances: Depends on the context. Students first encounter ‘free trade is optimal’ in econ 101 and I think that is a problem because, just anecdotally, I don’t think students at that level are equipped to make the subtle distinction between ‘free trade is Pareto optimal’ and ‘because free trade is Pareto optimal we should have free trade’ so in that context yes I think economists are advocating for free trade (even if it might not be deliberate or conscious). If lecturers noted explicitly that ‘free trade is Pareto optimal’ is different from ‘free trade is Pareto and therefore we should have free trade’ and students can grasp the difference then no I don’t think it is advocacy.

I’m generalising but my personal opinion is econ 101 curriculum is to simplistic and not critical enough. I understand there are constraints to teaching more sophisticated material due to student’s ability at that level, but anecdotally at least, I feel students come out of econ 101 thinking that economists think free trade is good, perfect competition good, monopoly bad, regulation is bad, taxes are bad, union are bad etc. etc. when really just because something is ‘Pareto optimal’ it doesn’t follow that you should support it normatively.

I’m generalising again, but I think when outsiders look at economists advocating normative positions they can’t distinguish it from positive economics and therefore it leads them to believe economics as an discipline is inherently ideological which might not or might not be problem but is something that annoys me.

Just to clarify some points.

I think positive economics = science, normative economics = politics. For example suppose you have an economist with an utility function, u(x,y). x denotes Pareto optimal policies which are enacted and y denotes the disutility to family and friends from enacting those Pareto optimal policies, e.g. the economist comes from family and friends who all work in the textiles industry and this industry would be destroyed if there is free trade.

Positive economics may tell us which policy is Pareto optimal but it can’t tell us whether the economists should support that policy. Whether the economist supports that policy depends on their values i.e. their utility function. So going back to my original response to Purple Library Guy, positive economics or economics as an academic discipline doesn’t support any policy as ‘optimal’ per se. When economists do support policies they are making normative choices.

Someone above quoted Mankiw: "Mankiw defines 'economics': the study of how society manages its scarce resources."

A quibble here. There's no intrinsic reason for capital to be scarce.

"The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital." Keynes, concluding notes to the General Theory.

Human behaviour and psychology, far more frequently than admitted in economics, totally drive real world events. There should be a mathematical formula for hubris.

Beezer,

But, as Keynes tacitly acknowledges in that very paragraph, that line is mistaken: "Even so, it will still be possible for communal saving through the agency of the state to be maintained at a level which will allows the growth of capital up to a point where it ceases to be scarce" i.e. savings and capital are scarce because the returns on savings and capital are scarce. Hence the abundance of capital that Keynes proposes can be obtained only at the cost of using the threat of physical force against the public, which leads me to think that (only any reasonable interpretation of 'intrinsic') it is the creation of an abundance of capital which is artificial, not the scarcity of capital. We can see this empirically by the failure of banks in the post-WWII era to maintain low rates of interest without resorting to totalitarian means e.g. in the failure of the Dalton experiment in the United Kingdom. So Mankiw is still right: economics is the study of how society manages scarce resource, including the theory of capital.

(Of course, that section of General Theory are famously one of the weakest.)

(One could add that the absence of scarcity in capital would be a state where the value of capital is zero or negative, either because it costs nothing to produce or because capital cannot reduce the costs of production or because of an absence of scarcity in consumer goods. None of these states of affairs are possible, since the creation of capital always makes other capital obsolete via technological progress and thereby increases the scarcity of capital. Keynes's mistake, I assume, is the old one of homogenising the heterogenous i.e. regarding the creation of capital as an addition to an effectively uniform stock.)

K: Maybe 5, 10 years ago, I would have thought like you, and defended the social sciences that way. But I've been reading more and more results of scientists' research into people's irrationality, and now I have my doubts. How do I know that the principal consumers of that research have that strong incentive to disprove it, am I possibly being subject to availability bias? Do I value the opinions of scientists and skeptics above those of creationists, aromatherapists and philosophers because the arguments are better, or because I've chosen to identify with those groups for non-rational reasons?
And note, particularly, we're talking about the social sciences here. Cold fusion belongs to the hard sciences - where often engineers can and will try to build something using that principle. A really good reason for thinking that evolution can work is that engineers use evolutionary algorithms. With the social sciences, it's harder to think of places where attempts to use the information in social engineering produce results that are clearly incompatible with the theory. Government programmes typically are implemented, have different results than expected, which the opponents proclaim as clear evidence of the failure of the programme, and the proponents say merely shows that the programme wasn't implemented right. One can still come across people who argue that a centrally-planned economy could work, what the collapse of Communism merely showed was the collapse of that particular system.

"If you think that a believing in science is equivalent to accepting any random idea on authority, I don't think you have thought about how science functions."

I don't even know what you mean by "believing in science", so I am unable to apply this idea to myself. I can believe in some scientific results, the Laws of Thermodynamics I believe in. I can believe that the process of science is better as a way of finding things out than any other way I know about (at least when mathematics cannot be applied). But I don't know whether this adds up to "believing in science", I certainly don't believe in every result that is claimed to be scientific, and indeed I think that such an attitude would be the opposite of scientific. However, as I said in my reply to Patrick, my problems with the research into irrationality come from my being inclined to accept those *particular* scientific results. If you have some good reasons why this research is wrong, I would be delighted to hear them.

Patrick: "To what extent is this sort of objections based on fear of the prospect of being forced to not do things you'd rather continue doing?"

If by "you'd" you mean the plural "you", I think to a very large extent.

"Someone else's irrational preferences costs the rest of us money. So who wins? Do we dump universal tax funded health care, or does the state use its power to coerce people to behave differently?"

If we had a rational government, then the logical answer would be the government. But we don't have rational government, what you don't mention in your analysis is that the state is made up of people. If people have irrational preferences in their own lives, I can think of no reason why they will suddenly be rational when running a government, or passing laws. (And we also know that even with perfectly rational voters, voting can produce irrational results). So we should expect a state to use its power to coerce people to behave irrationally form time to time, and indeed I can think of a lot of examples in history of them doing so (for a start, getting into a war was always a bad decision for the side that lost, sometimes arguably for both sides, and there have been a lot of wars).
I am reasonably confident that some laws do make society better off than total anarchy. But on the other hand, we know in the past that governments have passed and enforced laws, such as those requiring religious conformity, or male patriarchy, or banning homosexual acts, on the basis that such laws were necessary for society to function, but our modern societies are happily getting along with a lot more freedom in those areas. So governments can be wrong about whether a particular set of laws are necessary.
In terms of universal tax-funded healthcare, someone's rational preferences might also cost us a lot of money. For example, my brother (a non-smoker) was out cycling when a van turned right in front of him, leading to him getting a severe brain injury and costing the NZ government somewhere likely in the 100,000s of dollars range. He was wearing a helmet, and the doctors thought that without it he would have died, which, to be cold-hearted about it, would have been a lot cheaper for the NZ government. Was his decision to wear a helmet though, irrational, from his point of view? How about his decision to go road cycling rather than staying in the safety of a gym? How about his decision to enter a cycling road race which probably influenced his decision to be on the road rather than in a gym?

"I think it's perfectly legitimate to democratically decide that, in return for the benefit of public health care, people give-up some freedom and have some responsibility imposed on them. "

I would prefer for it to be rather illegitimate, as the potential loss of freedom in return for public health care strikes me as unending. What human behaviours don't have an influence on health? Speech can hurt people mentally, requiring mental health services and thus public expenditure, and quite arguably speech has contributed to some people with good persuasive skills getting into positions of power beyond their competence (as a Kiwi, my example is Winston Peters, you can probably think of a politician from your own country), so by your principle it would be legitimate to restrict freedom of speech. Freedom of religion - some religious practices impose health care costs (how many people are hit by cars while travelling to church?), so it would be legitimate to restrict that. Freedom of association - battered spouses do often require hospital care, so the state should be able to make decisions about who gets to associate with who.
Of course, I believe in freedom of speech, so I think you should be able to make some arguments in favour of restricting anything. But overall I'd prefer to live in a country where the constitution (be that written and/or in people's hearts) was such as to require a very high level of consensus to pass such laws, and to keep them on the books). I'd rather pay higher taxes for publicly-funded healthcare than give up on freedom whenever someone comes up with a plausible-sounding argument that exercising a freedom increases healthcare. Especially given all the evidence that we're likely to be making irrational choices ourselves.

Tracy: "I would prefer for it to be rather illegitimate, as the potential loss of freedom in return for public health care strikes me as unending. What human behaviours don't have an influence on health? Speech can hurt people mentally, requiring mental health services and thus public expenditure, and quite arguably speech has contributed to some people with good persuasive skills getting into positions of power beyond their competence"

A-effing-men, every word of it.

Tracy, by you'd I mean the contraction of 'you would'.

I don't buy the slippery slope argument. Nobody is proposing that we eliminate democracy. Your argument really just seems to boil down to wanting to rig democracy to favour your preferences.

And by democracy, I mean as it currently exists in Canada - parliament, the charter, the courts etc ...

Patrick: You are of course free not to buy the slippery slope argument. As I have said, I believe in freedom of speech. However, in this case I think the slippery slope argument is valid, in my own lifetime I've seen the taxation of dietary fat move from being a reductio ad absurdum to being an apparently serious policy proposal. I've heard health professionals recommend laws restricting freedom of speech about medical research. I know that democratic countries have laws banning holocaust denial, or vice-versa calling the killings of Armenians in the 1920s a genocide. The truth or otherwise of an argument is independent of whether you agree with it or not, millions of people "don't buy" evolution, but that doesn't mean that the law of evolution is false. (Note, I am not claiming that my slippery slope argument here is as well supported as the law of evolution, just that the fact that someone says that they "don't buy" an argument doesn't necessarily mean that there's anything wrong about the argument itself, all it may mean is that they don't like the conclusion.)

I notice that you don't present any actual argument as to what principle would limit the potential losses in freedom, under your proposal. You also don't make any response to my observation that since government is run by people, if people make irrational decisions then we can expect government to make irrational decisions.

And yes, I do want to rig democracy to favour my preferences, who doesn't? I'm a citizen of a democracy, when I vote I am hoping that the person or party I'm voting for gets in. When I vote in a referendum on a particular policy issue, I hope that the side I prefer wins. I think democracies should extend voting rights regardless of gender, race or sexuality, because I think a country is a better place when the government must take all those people's views into account. When I argue in favour of a policy, or against, I do so because I hope to persuade other people to act democratically in a way that I prefer. You say that "nobody is proposing that we eliminate democracy", but the fact that you apparently think that there's something illegitimate about me wanting to rig democracy to favour my preferences, makes me wonder if your argument here does imply an ending to democracy. How could the democratic process work, if everyone was indifferent to what the outcome was? (That's a serious question, btw, because I do think you are in favour of democracy despite what you've said about my argument.)

Tracy Wilkinson,

In a society where the costs of unhealthy eating are not fully born by the individual but by taxpayers (due to free healthcare) isn't the taxation of dietary fat (and tobacco and alcohol and narcotics) a reasonable request from taxpayers? Of course, that highlights a fundamental problem: any welfare state is, to some degree, faced with a dilemma between free riding and a loss of freedom.

Patrick - actually, it's just occurred to me, on rethinking, I don't think that I made a slippery slope argument in the first place. The slippery slope argument is one that goes:
1. Event X has occurred (or will or might occur)
2. Therefore event Y will inevitably happen.

But I didn't argue that adopting the principle you advocated would inevitably lead to the loss of freedoms I outlined. I pointed out that your principle would make legitimate some serious infringements on freedoms that I hope you and other readers think are important. Not that these infringements would inevitably happen, but that they might. Pointing out specific applications of a general principle is not a slippery slope argument. Plenty of countries have banned certain forms of speech, or certain associations, or certain religious practices, without imposing taxes on dietary fats. And such bans have often been justified by appeals to the general good and the costs that practitioners impose on society. (And in some cases, these are serious enough to make even me think they're legitimate, to take an extreme example, banning human sacrifices).

W. Peden - that's the whole question, what levels of infringement are reasonable? The idea that one can justify banning something just because there's some evidence that it increases healthcare costs strikes me as pretty unreasonable, but this is in the end a case of preferences, there is nothing in logic alone that tells us what value to place on freedom versus minimising taxpayer costs. To take your case, voters voted for publicly-funded healthcare, or at least keep voting for parties that keep continuing it, is it not equally reasonable that we put up with the consequences, including that we might be paying higher costs in some places?
(I also note that plenty of countries without welfare states have infringed important freedoms, and indeed the welfare states generally rate quite highly on the various international indices of freedoms I have seen, so I'm not that worried about welfare states in particular. Perhaps only states that place a certain value on freedom itself can generate enough wealth and political stability to support welfare states, and perhaps too many limits on freedom means that we'd lose both the freedoms and the welfare state.)

Tracy W,

I wasn't proposing banning dietary fat, but taxing it i.e. compensating other taxpayers for the cost.

"To take your case, voters voted for publicly-funded healthcare, or at least keep voting for parties that keep continuing it, is it not equally reasonable that we put up with the consequences, including that we might be paying higher costs in some places?"

There's a fallacy of composition there: what is true of the electorate is not true of every elector. I may want people to pay the costs of self-inflicted harms from lifestyle choices and I may be unhappy about being coerced into paying their costs for them, but that state of affairs is consistent with a majority being content with such a system.

As for welfare and freedom, my argument was not so much that welfare DOES lead to infringements on freedom, but rather than it SHOULD.

W. Peden, my apologies for my sloppy wording. Please do me the kindness of reading what I earlier wrote as saying "The idea that one can justify taxing something just because there's some evidence that it increases healthcare costs....", as I can't go back and edit it.

I however do not see how I have committed a fallacy of composition. From Wikipedia: "The fallacy of composition arises when one infers that something is true of the whole from the fact that it is true of some part of the whole (or even of every proper part)." I don't see any point where I ever referred to the parts, I just talked about voters as a whole, and the fallacy of composition is dependent on someone talking about the parts and also about the whole. If you can suggest a wording change to make it clearer that I was only talking about voters as a whole, please do so.

As for the idea that welfare *should* lead to an infringement on freedom - congratulations, you have made me more negative about the welfare state. It's interesting, I suspect that the concerns about infringements on freedom were brought up when the welfare state plans were being initiated, and were dismissed as slippery slope arguments, and here you are saying that those concerns about freedom were justified, at least in any society you're voting in. Would you mind if I cite you in the future as a reason to think that the welfare state will lead to further infringements on freedoms? (Beyond the obvious one of higher taxes, all else being equal, of course).

from an economist's perspective there should be no such thing as 'irrational behaviour'. the division between rationality and irrationality is a subjective, moral judgement, not an objective, scientific fact. the sole challenge for economists should be to economise, i.e. to abstract from reality through reasonable simplifications to make predictions that are approximate enough to be of use to the public and to policy makers. thinking otherwise is confusing politics with economics. not that the two can be separated in reality, but that's no excuse for not trying.

Tracy W,

I must now request charity on your part: I should have said "the fallacy of division", not the falllacy of composition. What is true of voters as a group is not true of each and every voter.

I'd be overjoyed if my position was cited. As I see it, to the extent that we have a non-actuarial social insurance system, we cannot justifiably have personal freedom. Of course, if you ask me, so far as it is possible I'd rather have an actuarial social insurance system where individuals have both the responsibility and accountability for their decisions, with the string attatched only for those unable to do so.

One can see the movement towards the slippery slope in America right now with mandatory drug testing for those claiming benefits. Charities have known for centuries that providing welfare necessitates a reduction of freedom on the part of the person accepting it, even if that just means that someone in a homeless shelter cannot drink alcohol that night. I am not surprised that welfare state is moving in the same direction: freedom without personal responsibility is unsustainable.

W. Peden: "Charities have known for centuries that providing welfare necessitates a reduction of freedom on the part of the person accepting it"

Err, I think that charities have been paternalistic for reasons aside from necessity.

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