The Blinders of Behavioral Economics

by Mario Rizzo 

At the turn of the new-year the Financial Times published two small articles about why people often do not adhere to their new year’s resolutions. One article was by a philosopher (Julian Baggini) and the other by a psychiatrist (Antonia Macaro). Interestingly, they each seem to focus on whether people really want what they resolve to do or not do. More fundamentally, the authors say, if people understood themselves better they would know more fully what their personal goals are and not have so difficult a time achieving them.  

To put things in the words of the ancient philosophical question: If you know the better, will you do the worse?  

Perhaps much apparent weakness of will is actually a failure to know oneself well enough to choose appropriate goals. As the philosopher says, “W]eakness of resolution could be a sign of weakness of conviction.” Thus, we are dealing not with a failure of will power but a failure to choose goals that really reflect what, given the agents values, would make life better.  

I suggest that this is not an empirical question but a philosophical one. For one reason, there is no independent way of ascertaining when an individual has sufficient self-knowledge to really know the better for himself. So we cannot say: Joe knows what is better (by empirical test A) and yet he does not do or choose it (established by a separate empirical test B). Plato argued that failure to do what is best is failure to know truly what is best.  

The error here is thinking that the individual is in a specific kind of disequilibrium in which he knows what he wants to do but cannot (for some reason) do it. Instead, perhaps, the individual is in a constant state of experimenting with his choices and is seeking something better but with no clear idea, ab initio, of what that might be.  As both our psychiatrist and philosopher say, the individual will be in a better situation if he reflected more deeply on his values. And yet none of this, it seems to me, means that the outside observer can tell us or him what should be done. Doing and reflecting are part of the same action. It is a process of self-discovery.  

This is not a comfortable position for today’s behavioral economists who want to establish normative preferences based on what individuals really want at some deep level. As the economist Frank Knight argued, the only thing we really want at a deep level is better wants. But they never simply arrive in stable form; the process is personal, uncertain and never ending.  

The root of the problem may be that economists (behavioral and standard) have allowed a mental construct of preferences – either simply revealed by choice or arrived at by some alternative means – to act as a normative standard. It is true that behavioral economists have argued that preferences are not fixed but sensitive to all sorts of bias-inducing factors like framing, visceral influences on decisionmaking, temptation, and so forth. And yet unless they want to give up subjective value theory entirely, they must privilege some expressions of preference – those made under idealized circumstances of “full” knowledge, perfect cognitive abilities, and no weakness of will. This is their gold standard by which the choices of agents are to be evaluated. But is there anything there? Do such preferences exist?  

While this framework may be useful for certain scientific problems of prediction, it does not seem to capture the process of decisionmaking through time. It is rather an attempt to adapt a static conception of choice (fixed preferences, fixed constraints) to internal dynamic problems. People may be dissatisfied with their own behavior and may be seeking to understand what might be better as they choose and act.  I do not see any compelling reason to transform a simple construct that is useful for some purposes into a normative standard. If the construct doesn’t work in certain cases to predict behavior, then so much the worse for the construct.  

Remarkably, behavioral economists who have spent much time and trouble to show the positive limits of the standard analytical apparatus are saying, “So much the worse for the troublesome individuals.”

This is not the last word on the subject by any means. But it does demonstrate the mental trap into which even smart people can get themselves when they fail to understand that models are constructions useful for some purposes and naive for others.

7 thoughts on “The Blinders of Behavioral Economics

  1. There are two ways of knowing something: head-knowledge and heart-knowledge. If you merely have head-knowledge, you can talk about it intellectually, but you don’t act as though you have that knowledge. If you have heart-knowledge, you act on the knowledge you have. Another way of phrasing it would be knowledge vs. understanding.

    Thus, one may have an intellectual knowledge of what the right thing is to do, but not have the understanding to do it. A smoker, for example, may have plenty of head-knowledge of the health effects of smoking, but keep smoking anyway. Why? One can say that they prefer the pleasure of smoking over the health problems, which may be true. But it also may be true that they haven’t turned the head-knowledge into heart-knowledge, such that they truly understand what the health problems are (head-knowledge lets the person say, “yeah, but it will never happen to me,” while heart-knowledge makes the person realize, that “it most certainly can happen to me”).

    One can tell if one had heart-knowledge by if they are acting on it. It is otherwise a mere intellectual game — or, head-knowledge — to them.

  2. I do not have an answer, or even a good question, but the problem in known in criminology. It may be the key question: Why do people commit crimes?

    We have perhaps 40 distinct theories of criminal behavior – structuralism, anomie, social conflict, differential learning, free will and choice (of course), and more. Free will and choice tend to look to calculation, but that may not mean monetary gain.

    Interviewing prisoners is not always fruitful. Some will lie and they have several different motives for that. Some do not know themselves well enough, or at all, apparently, and can present no connected or meaningful statements about themselves.

    These are merely stark examples of this common problem: how do we know what is inside someone else’s head (or heart… or liver…)?

  3. I think part of the problem for too many “mainstream” or “behavioral” economists to fully accept the type arguments made in a very clear and insightful way by Mario, is that it would require these economists to at least concede the fact that there may be some things that cannot be known (or at least not fully) or modeled.

    And if they attempt to model these mental processes for their “scientific” purposes they inevitably must assume away essential aspects of how people may actually think, weigh and decide among courses of action from which they may choose, and/or simplify the context within which such decisions are made.

    Why do they want to model and constrain the decision processes? So they can have (more or less) predictive and “controllable” outcomes. Otherwise, they might have to say, at least to some extent, “We don’t know why, and we cannot determine what the results might be.”

    And these types of economists seemed to be “frightened” of having to deal with this. It too severely challenges some aspects of what they consider and define what it means to be a social “scientist,” including economists.

    It sounds too much like that line with which many old Frankenstein movies ended: “There are some things man was not meant to know.”

    Well, there may be things that man may never be able to know about the workings of his own mind — because you cannot fully step out of the confines of your own mind to fully understand how your own mind works, as if you were a Being greater than a mortal man, and were able to see man from wider perspective than man, himself, can ever possess.

    And I am not being “mystical” here. It is a point similar to one that Hayek once made in a piece of his from the 1960s, which I think was entitled “The Primacy of the Abstract” (I’m away from home and don’t have my Hayek files at hand to check the title for sure).

    Richard Ebeling

  4. Mises and Rothbard emphasized that economics deals with ends and means as actually expressed in real action, not with what some armchair behavioral “economist” thinks someone ought to do or could do if only he could get in touch with his inner feelings, inner child, or whatever buzzphrase you want to cook up.

  5. Alternatively, (or in addition), the problem may not be that we don’t know are “self” but that a unified self does not really exist and it is just an imperfect illusion, as Marvin Minsky’s “The Society of Mind” theory would suggest.

  6. To reiterate Richard’s point, some things may be unknowable. If so, it represents a bigger problem for the pretenses of psychology than of economics.

    Mario focused on the limitations of models. That point has implications well beyond the current topic. The move from a predictive model to normative conclusions is always perilous.

  7. What you call “Weakness” I would call a lack of virtue, per Aristotle’s definition of virtue:

    “A state of character concerned with choice, lying in a mean, i.e. the mean relative to us, this being determined by a rational principle, and by that principle by which [a person] of practical wisdom would determine it.” (as translated by Ross)

    Self-discovery or understanding is not sufficient if wisdom is not acted upon.

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