Wednesday, July 30, 2008

Economic decisions - complex but not irrational?

In The New Republic (July 9, 2008), Alan Wolfe assesses recent books that claim that economic decision-making is irrational:
Economists used to believe that it was unnecessary to measure utility except in this way: the price that a person was willing to pay for something established its utility, and so there was no need to dig any deeper, to examine what was driving the psyche of the economic actor. But the behavioral revolution in economics challenges this assumption. It is based on the idea that we must look into that black box called the human mind to find out whether the things that we say we want really do give us pleasure. Utility, after the revolution, is no longer abstract. It is lived, experienced; it is existential. And fortunately, or so these books argue, the field of psychology has uncovered timely and fascinating truths about the ways our minds work, and these insights may breathe new life into the old idea of utility. Hedonic psychology, happiness research, behavioral economics, economic psychology, the study of well-being, judgment and decision-making--call it what you want. Suddenly everything we thought we knew about economics begins to look different.
In other words, if you think something makes you happy, it probably does. It may not be wise or good or right, but a decision to pay for it is based on many complex factors. Wolfe also offers a helpful caution:
... , I conclude that we should once and for all stop calling for revolutions in our understanding of ourselves, and end this remarkable presumption. In the long history of humankind, the social sciences were developed only recently, but we have been trying to figure ourselves out since we first began to think. It defies the imagination that one new methodology or theoretical assumption is going to topple all previous efforts to understand the human condition. Sometimes revolutions in our understanding of the world do happen--they tell me that Albert Einstein led one (and that, having done so, he spent the rest of his life running down the wrong paths)--but they are rare in the physical sciences, and they are next to nonexistent in the social sciences. Human beings are indeed charming and perverse and altogether fascinating creatures, and the study of ourselves is among the richest of intellectual endeavors. We ought to give ourselves a bit more credit than the revolutionists of the social sciences extend to us: we pursue many goals at the same time, and we do so in all kinds of predictable and unpredictable ways.
It pays to listen to what people actually say instead of trying to find out how a monkey would think about it.

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