Saturday, March 8, 2008

Why behavioral economics misses the point...

Behavioral economics has a number of unexamined assumptions but certainly one of the most obvious is the assumption that rationality is identifiable and distinguishable from irrationality. But what is rationality?
Can it be deconstructed into a series of rational decisions and choices or perhaps it emerges complete and seamlessly integrated as the rational individual? Are there levels of rationality? Do we give the individual a pass if they are children or from a different culture. Is Sherlock Holmes rational (perhaps hyper-rational?) in his ability to extract information out of what are to the reader (and Dr. Watson) unconnected observations?

Is rationality only defined after we have indexed an individual's beliefs and mental habits?

Before the analysis that precedes a decision can be done, the individual must make some distinctions as to what information to use and what information to ignore. Much of what passes for behavioral economics asserts that there is an irrational element to this selection process. Leaving aside the issue of how filtering data can be characterized as irrational, behavioral economists often assert that individuals don't use the correct time frame, overuse easily accessible and understandable data, and combine data from irreconcilable data sources. In summary, they don't act like academic economists. But wait, do theoretical physicists pooh-pooh adults who don't understand the logic of string theory. No, they recognize that they have acquired specialized set of beliefs that are not relevant to life outside of the sub-atomic. So why do economists, having studied academic models for decades then deride non-economists for being overly affected by information from their immediate environment; for not being sceptical enough about their information sources; for being impulsive in their decision making; and short-sighted in estimating the future.
Oddly enough, behavioral economists borrow heavily from both mathematicians and psychologists to come up with a set of ideas that only make sense to those whose motives are generally self-serving, e.g. I need justification for exploitation (let me manage your money for a fee and you will still be better off) institutional power( you are short-sighted and childish and need to be protected from yourself). .

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