Behavioural economics is very much in the news. Tim Harford takes a slightly skeptical look at it in the Financial Times today. In a recent post Chris House noted that few young researchers were taking up the baton, and anyway there are relatively few significant papers in the field. These have followed (in my order of reading) a rather intriguing OECD blog post by Vela Velupillai distinguishing between classical and modern behavioural economics (CBE and MBE). The classical version, from Herbert Simon’s 1953 paper, A Behavioural Model of Rational Choice, onward, is presented as more radical because it assumes no preference ordering and where there is no optimising but rather satisficing. Prof Velupillai writes:
“MBE concerns the behaviour of agents and institutions in or near equilibrium; CBE investigates disequilibrium or non-equilibrium phenomena…. MBE accepts mathematical analysis of (uncountably) infinite events or iterations, infinite horizon optimisation problems and probabilities defined over s-algebras and arbitrary measure spaces; CBE only exemplifies cases which contain finitely large search spaces and constrained by finite-time horizons.”
I have no idea what an s-algebra is, but the point is clear – as the post continues:
“Though the behavioural models do consider more realistic psychological or social effects, economic agents are still assumed to be optimising agents, whatever the objective functions may be. In other words, MBE is still within the ambit of the neoclassical theories, or is in some sense only an extension of traditional theory, replacing and repairing the aspects which proved to be contradictory.”
This is interesting in the light of having read recently Gerd Gigerenzer’s Gut Feelings, which one could sum up as being about the rationality (in the sense of using mental resources efficiently) of non-rational (in the sense of calculating) decision-making via the use of rules of thumb. Gigerenzer takes issues with precisely the frequent behavioural econ assumption that decision-making is done as in the rational choice framework except with biases. Not always – Kahneman’s Fast Thinking clearly overlaps with the use of rules of thumb.
Gut Feelings: Short Cuts to Better Decision Making
Thinking, Fast and Slow
Fascinating territory. I need to think, not fast or slow, but long and hard about this.