Saturday, June 11, 2011

Elementary motives?

A very nice post by Aviad Heifetz over at Leisure of the Theory Class, comparing the current state of behavioral economics with 18th century chemistry as they attempted to transition away from alchemy and phlogiston.  I recommend checking the whole thing out (it's not long), but here's a snippet:
Are there any “elementary” motives of human behavior? Whatever the answer, it could be useful to keep the perspective that today’s behavioral economics, with its incremental efforts to classify dispositions and their implications, may eventually serve as a jump-board for a future conceptual breakthrough and a better paradigm; but that the language, approach and concepts of such a new paradigm may very well turn to be decisively different than those employed by behavioral economics today.

1 comment:

  1. Exogen(e)ous CombustionJune 12, 2011 at 9:31 AM

    Heifetz writes:

    "There haven’t yet emerged any clear 'rules of the game' for behavioral economics that bound the framework [...] as well as the legitimate questions to ask within the framework and the ways to tackle them."

    My suggested cornerstone comes from John List's general body of work, and what I consider the most interesting behavioral economics. It was recently in May AER (P&P), and can be found here:

    The idea is as follows: we have behavioral anomalies, such as differences between willingness to pay and willingness to accept, which acts as some sort of "transaction tax." Well documented in the literature.

    Also documented in the literature is that this anomaly goes away with experience. When people do something repeatedly they become efficient at it, and move away from their no-longer-cheap biases.

    List went one further step, noting that experience was endogenous in these experiments and got a subject pool that traded all the time (in this case, baseball card collectors). As traders had more experience, the disparity went away.

    And so, my proposed cornerstone: as costs of biases go up, people converge to the rational choice framework. This sort of argument can be seen as being in the vein of Becker (1962)'s "Irrational Behavior and Economic Theory" which stated that even people so irrational as to have random purchases would produce a downward sloping demand curve, given a budget constraint.

    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.

    My own, more broad take is that we hardly understand frictionless markets in so many things. So much of what Becker and Murphy do have indicated that to me (but also what Cochrane does with inflation, for a different example). The addition of frictions before we understand our simplified paradigm seems to be a bridge too far.

    Interested in your take on the subject, as it is sure to be different from my own.