The Behavioural Economics Guide 2016 (with an intro by Gerd Gigerenzer)

The Behavioural Economics Guide 2016 is out (including a couple of references to yours truly), with the introduction by Gerd Gigerenzer. It’s nice to see some of the debate in the area making an appearance.

Here are a few snippets from Gigerenzer’s piece. First, on heuristics:

To rethink behavioral economics, we need to bury the negative rhetoric about heuristics and the false assumption that complexity is always better. The point I want to make here is not that heuristics are always better than complex methods. Instead, I encourage researchers to help work out the exact conditions under which a heuristic is likely to perform better or worse than some fine-tuned optimization method. First, we need to identify and study in detail the repertoire of heuristics that individuals and institutions rely on, which can be thought of as a box of cognitive tools. This program is called the analysis of the adaptive toolbox and is descriptive in its nature. Second, we need to analyze the environment or conditions under which a given heuristic (or complex model) is likely to succeed and fail. This second program, known as the study of the ecological rationality of heuristics (or complex models), is prescriptive in nature. For instance, relying on one good reason, as the hiatus rule does [If a customer has not made a purchase for nine months or longer, classify him/her as inactive, otherwise as active], is likely to be ecologically rational if the other reasons have comparatively small weights, if the sample size is small, and if customer behavior is unstable.

And the “bias bias”:

The bias bias is the tendency to diagnose biases in others without seriously examining whether a problem actually exists. In decision research, a bias is defined as a systematic deviation from (what is believed to be) rational choice, which typically means that people are expected to add and weigh all information before making a decision. In the absence of an empirical analysis, the managers who rely on the hiatus heuristic would be diagnosed as having committed a number of biases: they pay no attention to customers’ other attributes, let alone to the weight of these attributes and their dependency. Their stubborn refusal to perform extensive calculations might be labeled the “hiatus fallacy” – and provide entry number 176 in the list on Wikipedia. Yet many, including experts, don’t add and weigh most of the time, and their behavior is not inevitably irrational. As the bias–variance dilemma shows, ignoring some information can help to reduce error from variance – the error that arises from fine-tuned estimates that produce mostly noise. Thus, a certain amount of bias can assist in making better decisions.

The bias bias blinds us to the benefits of simplicity and also prevents us from carefully analyzing what the rational behavior in a given situation actually is. I, along with others, have shown that more than a few of the items in the Wikipedia list have been deemed reasoning errors on the basis of a narrow idea of rationality and that they can instead be easily justified as intelligent actions (Gigerenzer et al., 2012).

————–

A recent Spectator article on an interview with Richard Thaler – a contributor the 2016 Guide – opened with the following:

‘For ten years or so, my name was “that jerk”,’ says Professor Richard Thaler, president of the American Economics Association and principal architect of the behavioural economics movement. ‘But that was a promotion. Before, I was “Who’s he?”’

On hearing that Gigerenzer had written the introduction to the Guide, Thaler tweeted:

I suppose Thaler is now the establishment and Gigerenzer is “that jerk”.

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