Behavioral Economics: Rocking the Boat

by Mario Rizzo  

It seems as if it has become increasingly common for bloggers who are also academics to post the syllabi of courses that may elicit some general interest. In that spirit I post my syllabus for a graduate course in behavioral economics here.  Behavioral Economics 2011 Course 

Despite some rhetoric to the contrary, academics are a very conservative group. They (me too?) hate disruption of their research agendas by young upstarts who rock the boat. Where is the respect for their elders who have given the best years of their lives to orthodoxy? From the orthodox perspective, behavioral economics is, I should think, especially unpleasant. Luckily, I do not consider myself a part of an economics orthodoxy. 

A few observations are in order. First, I believe that behavioral economics, interpreted broadly to include experimental economics, is the most important development in economics in a long time. To a large extent, it stands as a challenge to standard economics, including Austrian economics. It challenges the revealed preference approach of neoclassical economics, especially as developed by Samuelson, but also as amended more recently by others. It also challenges the Austrian view insofar as Austrians have also eschewed psychology in their elaboration of the theory of value and choice. As readers of this blog will know, I have been critical of Ludwig von Mises’s approach to rationality which makes irrational action impossible, by definition. Behavioral economics is causing us all (or should be) to think more deeply about rational decisionmaking.  

Second, there are many areas in which behavioral economists have set the agenda and to which others are simply responding. This included the recent boom in policy recommendations under the rubric of paternalism or the malapropism “libertarian paternalism.”  I am exasperated at the superficiality of the work here.  

Third, most courses in behavioral economics are by practitioners who want to convey to students their excitement about the field and the new revolutionary framework to which they are contributing. I am trying to do something different. I am trying to get graduate students both to learn behavioral economics and to evaluate the whole paradigm with a rigorous critical eye.  

I hope teaching this course will increase my own insights and understanding of not only behavioral economics and its neoclassical opposition, but also perhaps will help me find a new way of dealing with the issues raised by both schools of thought.

25 thoughts on “Behavioral Economics: Rocking the Boat

  1. I’m glad to hear this. I’m a practitioner of behavioural economics myself but I entirely agree with your sense that it lacks a proper philosophical foundation.

    I think Bob Sugden’s work raises an insightful question though I don’t agree that he has found a satisfying answer to it; equally, Thaler and Sunstein’s response is not quite convincing either.

    My view is that there’s a whole area of positive economics to be developed, by looking at realistic cognition and decision-making and extending them to micro or macroeconomic models. It’s hard to produce good normative economics before we’ve got further with that modelling.

    I look forward to hearing your intelligent critique of behavioural economics and I imagine that teaching this course will help. I hope you have some imaginative and challenging students!

  2. Behavioral economics will make a great contribution, just as long as the theories that drive the program make sense and the players don’t lose sight of the other factors at work.

    For example Talcott Parsons had a nice model in The Structure of Social Action, 1937, almost duplicating von Misesian praxeology, but he took a turn into general systems theory, never learned economics properly and turned to Freud for the behavioral components of his model.

    For behavioral, cultural and linguistic theory there was a wonderful program initated by Karl Buhler, who did his best work in Vienna, but he lost half his career when the nazis expelled him and enemies wrote him out of the history of psychology.

    Karl Buhler’s efforts to found a new psychology began with the insight that the two great paradigms of psychology, the
    Aristotelian and the Cartesian, failed because of systematically false assumptions.

    One is based on religious ideas about a soul, the other on the assumption that man is a machine. Buhler proposed a number of principles which he called “maxims of life-research”. These defined his research program.

    1. The situational model of action, emphasising that the individual is not
    passive but participates in the formation of the environment. “For this reason it is not possible to proceed on the basis of sense data, images, feelings, reflexes or the like; this basis does not make it possible to undersand the meaningful behaviour of the individual”.

    2. Actions are oriented in relation to space and time. Temporal considerations include the daily rhythm of sleeping and waking, and the longer-term activity of planning.

    3. The inventiveness of the acting individual and creative behaviour. Buhler
    emphasised the intimate relationship of psychology with biology and medicine
    on one side (the science of men and animals) and with the human and social sciences on the other side, including custom, law, art and religion.


  3. Mario,

    I must apologize, but I seemed to have missed reading your comments on Mises’ use and definition of “rational action,” which you posted in December.

    Though it may seem out of place, and more a comment on that post than this one, I would still like to say the following.

    From my reading of Mises, a driving force for defining all intentional action as “rational,” given the ends being pursued and the actors beliefs and expectations, etc., was to refine the arguments in support of “value-free” social science that Mises was taking over from Max Weber.

    Having adopted fairly closely Weber’s conception of “action” as human conduct to which the actor consciously assigns a goal, he also wished to defend Weber’s critique of various members of the German Historical School who frequently inserted their own views and values into their presentations of supposedly “objective” analysis of social situations and their outcomes.

    Some of those Historicists would declare that the pursuit of wealth, or self-interest, or monetary profit were “irrational” forms of conduct that were clearly misguided from a “higher” or more “ethical” understanding of an individual’s “true” interest — often (in that late 19th century German political environment) in terms of the individual’s “proper” or historically determined place in the furtherance of the “nation” or the “Volk.”

    Or the Marxists of that time would refer to the individual’s “true” interest relative to the “class” to which he belonged. And if he acted contrary to that “class interest” to which his “real” status and betterment was attached.

    Or as one other example, Mises in 1935 wrote a short piece on ‘The Cult of the Irrational,’ in which he critiqued those who insisted that, for example, for an individual to buy foreign imported goods was to act “irrationally” against his own “true” interests as the member of an economic national community.

    Whether one finds Mises’ thinking satisfactory or not, his purpose was to insist that it is presumptuous for one individual to claim that he “really” knows the “true” or “rational” interests of another. That this is, in fact, the critic superimposing his views and value judgments on the actions and choices of another, when he disagrees with it, or wishes that other individual had or would choose and act differently.

    “Ends” or ultimate values are individual and personal and cannot be judged. I believe in “Theory and History,” Mises uses the example of the early Christians threatened with being killed in the Roman arena if they did not publicly renounce their belief in and loyalty to Jesus Christ.

    Was it “irrational” for them not to publicly renounce their faith to save their lives? Not if you are weighing the “benefit” of preserving a relatively short “mortal life” at the “cost” of eternal damnation, rather than be in the arms of God for eternity.

    Now, you could say: how ignorant or “irrational,” since God, “obviously, does not exist, or has been incorrectly assigned some higher than “objective” probability that He actually exists in weighing the “life” or “death” choice.

    But, Mises argues, from his ideas, beliefs, and expectations, the Christian who faced death with the lion in the Roman arena was acting very rationally — from his point-of-view.

    A more modern instance, perhaps, would be those who were put into mental institutions in the old Soviet Union for criticizing or opposing the regime. The regime’s psychiatrists said that such opposition demonstrated some mental illness or “irrationality,” since Marxism has “proven” that history was one the side of the inevitable victory of the working class in the global struggle with capitalism, and the Communist Party of the Soviet Union was history’s assigned agent to further that victory. What could be more “irrational” than to oppose the communist regime, since it was agent of the “laws of history,” which were ‘objectively” provable!

    By taking the actor’s ends and goals, and purposes as “given,” and attempting to analyze what actions were undertaken by him to try to bring them about, no critic masquerading as a “social scientist” could sneak in his own value-judgments about what the individual has chosen to do.

    Rather the analysis is shifted to a different level. Whether the means chosen may or may not be the most effective or appropriate to attain the goal in mind.

    I can’t tell a person who lives in, say, New York that he shouldn’t go to Hollywood to pursue an acting career. But if he is determined to go, and by the shortest route, I can comment on whether he has chosen the right interstate highway on which to make the journey to California.

    Richard Ebeling

  4. Also, you’re spot on about the superficiality of “paternalistic libertarianism,” at least from a philosophical standpoint. However, it seems, to me at least, that PatLibs are mostly concerned with doing what they can given the current system. This seems rather practical, given that incremental change are easier to implement than wholesale changes.

  5. Many thanks to Professor Rizzo for his open-minded post and helpful course bibliography.

    I’m in the midst of reading Richard B. McKenzie’s _Predictably Rational? In Search of Defenses for Rational Behavior in Economics_. I was surprised not to see this work on the bibliography.

  6. Second, there are many areas in which behavioral economists have set the agenda and to which others are simply responding. This included the recent boom in policy recommendations under the rubric of paternalism or the malapropism “libertarian paternalism.” I am exasperated at the superficiality of the work here.

    Not for the feeble (or even nubile) minded!

  7. Speaking of orthodoxies, real busines cycle theory seemed pretty orthodox and cutting edge before the cris, but using it now to explain and comment events seems like heresy. Even some sort of Austrian business cycle or any hitherto “hetherodox” theory seems more plausable.

  8. To Richard Schulman above: We (the students) were given a supplementary reading in the McKenzie book this past week. (:

  9. There is a very interesting contrast here between von Mises and Hayek– whose critique of central planning highlights the limits of rationality, of course. People have pointed to the similarities between the empirical findings of cognitive biases and Hayek’s earlier arguments on the inherent limits of knowledge.

    I have not read a comparison of Mises and Hayek on this point. If anybody has a reference, would be grateful for it.

  10. Bogdan;

    Not so fast. It’s not because this crisis seems to be explained much more easily by the Mises-Hayek theory that there can’t be other types of fluctuations too.

  11. I will take behavioral economics more seriously when it turns its speculative gaze inward & determines conclusively that its practitioners are rational beings themselves. Or is that just flat-out impossible?

    I’m re-reading Mises’ Economic Policy: Thoughts for today and tomorrow, and just passed the section wherein Mises briefly addresses the different loci of foolishness in different economic systems. A feudal system only tolerates the foolishness of the sovereign, a socialist system that of the planner, and a capitalist system that of the consumer, etc., etc. In my relative ignorance I fail to see how the policies suggested by the behavioral economics of Ariely, Thaler & Sunstein do not seek to expropriate the consumer’s right to be foolish and give it to someone else whose “skin” may or may not be in the game.

    The back-of-the-envelope examples of poor schlubs picking brownies over fresh fruit and failing to participate in their employers’ generous retirement plans fail to include what happens when the “right” choices in one context become the “wrong” choices in another–when apples are poisoned and stock markets tank. Behavioral econ might offer more insight if it encompassed these meta-failures of rationality.

  12. Hello!

    I really like the syllabus. Any chance that this course will be podcasted?

    Best regards from Germany,

  13. Is there ANY critic of Austrian economics out there who can make his arguments without misrepresenting the ideas he pretends to criticize?

    Mario Rizzo writes: “I have been critical of Ludwig von Mises’s approach to rationality which makes irrational action impossible, by definition.”

    But in “Praxeology”, Murray Rothbard writes:
    “Let us note that praxeology [i]does not assume that a person’s choice of values or goals is wise or proper or that he has chosen the technologically correct method of reaching them.[/i] All that praxeology asserts is that the individual actor adopts goals and believes, [i]whether erroneously or correctly[/i], that he can arrive at them by the employment of certain means.”

  14. I fully understand the Mises-Rothbard argument. I made my points in the blog post linked. It has to do with the *usefulness* of this tautology.

  15. ‘“Ends” or ultimate values are individual and personal and cannot be judged.’

    Actually, they can…at least to the extent that there is evidence that those ends treat other people as ends in themselves, or as means to another’s ends.

  16. “Ken,”

    No, it seems to me that all that can be said is that in situation “A” Joe interacts with Bob in a manner that treats Bob as a person whom he must respect and defer to when they have a disagreement about some associative possibility. (For example, Bob does not find Joe’s offered terms of trade sufficiently attractive, and turns them down. Joe says, “Well, I’m sorry to hear that, but I respect your decision, and I’ll see if Sam is interested in some trading arrangement.” That is, he does not presume that he can force Bob into a transaction against his will.)

    In situation “B,” Joe offers a similar associative arrangement to Bob, but when Bob turns it down, Joe does not respect or deter to Bob’s decision. (For example, Joe says to Bob, “You will trade on my terms or I will use physical force to compel you to accept my terms.” Or, Joe turns to a thug [sometimes called a politician or a bureaucrat] to compel Bob’s participation in the transaction.)

    By itself, it seems to me, that is all — as social scientists, economists — we can say about these two situations. We can also proceed to analyze resulting “secondary effects” (“what is seen and what is not seen,” “unintended consequences of human action, etc.). But, again, we can only attempt to explain these “side effects.”

    But, per se, that analysis does not imply any value judgment concerning their “goodness” or “badness.” That requires some point of orientation, a perspective, a “viewpoint,” from which Joe’s conduct toward Bob, and any such secondary effects are evaluated and weighed as “better” or “worse.”

    As economists, we usually adopt a perspective of some type along the lines that Mises’, in general, followed. Are the outcomes from these actions consistent with the goals and ends the actors’ had in mind? That is, basically some form of “consequentialism.”

    About whether it is “good” or “bad” in itself for Joe to view or treat “Bob” as an end in himself or “only” as a means to his own ends, who is to be forced and manipulated to do Joe’s bidding, that requires viewing Joe and Bob from some wider philosophical perspective. Just “observing” and analyzing their actions and the consequences resulting from their interactions does not, in itself, provide us with an answer to that “good” or “bad” question.

    Richard Ebeling

  17. One confusion, I think, is that behavioral economists seem to take some notion of individual or social welfare as their explanandum. For the “classical” economists (in Mario’s sense of the word, i.e. including the Austrians), the explanandum is behavior, not welfare. If we want to understand the price of tomatoes, we don’t need to know if tomatoes really are nutritious, only if people think they’re nutritious (or delicious or whatever). Mario worries that Mises’s tautology isn’t useful, in explaining the desirability of various market outcomes. But if the goal is simply to trace prices and quantities and other economic phenomena to their root causes, a la Menger, the tautology is quite useful.

  18. Was reading with great interest Dan Ariely’s Irrational book until the feeling of superiority became too much (among other complaints); and I cannot get past the following example: mother (junkie) leaves her kids in apartment while she goes out and gets high. Perfectly rational for her, given her time horizons and expectations. Rationality: given a set of conditions, the weighing of one course of action against another. In ratio! Not ‘reasonable,’ ‘right’, or even ‘maximizing’ by some ‘objective’ standard.
    My impression is that behavioral economists (though I still enjoy the work) are ‘framing’ experiments in such a way as to reinforce the presupposition that human’s are ‘irrational’; and that ‘irrationality’ leads to some morality-based ‘intervention.’
    Within limits, people drive the speed limit. Why? Because they are irrational? People generally drive on the right side of the road. Why? People generally do not French kiss lightbulb sockets. Why?

  19. Although I find behavioral economics (Predictably Irrational, Nudge, etc.) rather entertaining, I find it a bit frustrating because the authors never define what is “rational” and why they’d expect humans to behave that way in the first place. So it seemed more about “surprising” behavior rather than irrational behavior.

    At least Austrians provide an actual definition of rationality (using means that one thinks will achieve ones goals), and a realistic one.

    Also, there is a question of whether behavioral economics experiments are too narrow replication of reality to draw interesting conclusions because it lacks repetition and adaptation ([one-trial basis]( Lets say that people behave in some “irrational” way, once someone realizes that he may offer a pre-emptive solution (improving the defaults or the features of the good or the market design).

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