Sunday, June 12, 2011

Classical vs. Behavioral

Exogen(e)ous Combustion comments in response to yesterday's post about the future of behavioral economics.  Here is an excerpt:
And so, my proposed cornerstone: as costs of biases go up, people converge to the rational choice framework...Its these sort of arguments that make be believe that behavioral will never constitute a new paradigm. Instead, I see it as a perhaps-useful, perhaps-not addition to the rational choice framework (just like frictions can be to the current frictionless markets paradigm). One that has real effects, but effects that can be bounded and generally only effect the mostly-indfferent individuals.

And here is my position.  First, it annoys me when behavioral economics is treated in the popular press -- or by behavioral economists who are trying to sell it --- as the Great Overthrower of classical economics.  "Economists used to assume XYZ, but that turns out to be wrong, and a new generation of economists is proving it!"  My problem with this is not that behavioral isn't valuable.  Rather, behavioral and classical economics both have regions of behavior over which they perform better, and there is no inherent conflict between the two if they're talking about different things.  Sometimes a simple rational model works pretty well, sometimes not.

From here, we can study which regions classical and behavioral do well over; that is a worthy topic, and it's very much in dispute.  However, I don't think there's much point in attempting to delineate the boundaries of economics, so as to include or exclude one of these regions. If it is the case that behavioral anomalies tend to disappear as the market or the stakes grow, then that is a statement only about the province of behavioral economics.  It is good to know (although, for the record I'm not endorsing or rejecting this statement here), but it doesn't mean that "real" economists don't worry about these behavioral effects, or that the behavioral paradigm will never amount to anything "important."  Economics is a toolbox, and I don't think we should be telling people what region of behavior they ought to be applying it to.  Large markets are important, but a lot of behavior does not take place in them, and is it just me or are we missing something by leaving the latter to the psychologists?  I think the economic perspective has something to add.

By the way, we could say a similar thing about neuroeconomics.  I view Gul and Pesendorfer's critique as a successful rebuttal of the claim that neuroeconomics will be able to support or reject classical economic theory, but I'm not ready to draw the semantic line between neuroeconomics and economics proper, as they do:

The neuroeconomics program for change in economics ignores the fact that economists,
even when dealing with questions related to those studied in psychology, have different
objectives and address different empirical evidence.

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