Keeping economists honest

Paul Frijters has written an interesting review of Daniel Kahneman’s Thinking Fast and Slow over at Club Troppo. In the review, Frijters suggests that Kahneman’s main contribution to economics is keeping economists honest:

In terms of the whole rationality debate, the main contribution that Kahneman makes with this book, and that he in my opinion has made throughout his career, is to keep economists honest. …

Kahneman’s value derives from the great temptation amongst economists, particularly those of a strong theoretical bent, to fall in love with their abstractions and to pretend they are accurate descriptions of how things really work. Whereas the early economists were explicit about how their view of ‘rational economic man’ was merely an abstraction, later generations have far too often taken that abstraction and other closely associated ones (such as the whole notion of stable preferences, discount rates, loss-aversion, risk-aversion, etc.) literally. The number of economists I know who pretend to their students and themselves that things ‘derived’ from these abstractions, like the Welfare theorems, ‘prove’ things about the real world is astoundingly high. That pretence cannot be confronted and belittled often enough. Our models are derivative of an understanding of the real world, not the ultimate source of that understanding.

Each time an economist develops a model incorporating individual choice, the economist should ask whether changing the underlying assumptions to incorporate loss aversion, the planning fallacy or any of the raft of other biases and heuristics identified by Kahneman and colleagues is likely to change the model conclusions. It is worth knowing what is built on sand.

Otherwise, most of Frijters’s post is focused on the usefulness of the System 1 and System 2 device that Kahneman uses through the book to describe the two modes of human thinking – fast, intuitive use of heuristics and slow rational calculation. Frijters doubts that the System 1 and System 2 device will be broadly adopted in the mainstream economics canon as, among other reasons, the distinction between System 1 and System 2 is unclear and there are more intuitive alternative labels available.

In part, I feel that Frijters was looking for something different to what Kahneman sought to provide. Kahneman was using the labels to frame the body of work and to offer a way of thinking about it, and not seeking to sell System 1 and System 2 as the all-encompassing framework for economic analysis. Kahneman chose the System 1 and System 2 labels over others for working memory reasons. Further, the adoption of the dual process account of reasoning under the System 1 and System 2 and other labels throughout psychology (and even popular discourse) suggests that it has some utility. Whether economists find it useful and take it up is another question.

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