Psychology as a knight in shining armour, and other thoughts by Paul Ormerod on Thaler’s Misbehaving

I have been meaning to write some notes on Richard Thaler’s Misbehaving: The Making of Behavioral Economics for some time, but having now come across a review by Paul Ormerod (ungated pdf) – together with his perspective on the position of behavioural economics in the discipline – I feel somewhat less need. Below are some interesting sections of Ormerod’s review.

First, on the incorporation of psychology into economics:

With a few notable exceptions, psychologists themselves have not engaged with the area. ‘Behavioral economics has turned out to be primarily a field in which economists read the work of psychologists and then go about their business of doing research independently’ (p. 179). One reason for this which Thaler gives is that few psychologists have any attachment to the rational choice model, so studying deviations from it is not interesting. Another is that ‘the study of “applied” problems in psychology has traditionally been considered a low status activity’ (p. 180).

It is fashionable in many social science circles to deride economics, and to imagine that if only these obstinate and ideological economists would import social science theories into the discipline, all would be well. All manner of things would be well, for somehow these theories would not only be scientifically superior, but their policy implications would lead to the disappearance of all sorts of evils, such as austerity and even neo-liberalism itself. This previous sentence deliberately invokes a caricature, but one which will be all too recognisable to economists in Anglo-Saxon universities who have dealings with their colleagues in the wider social sciences.

A recent article in Science (Open Science Collaboration 2015) certainly calls into question whether psychology can perform this role of knight in shining armour. A team of no fewer than 270 co-authors attempted to replicate the results of 100 experiments published in leading psychology journals. … [O]nly 36 per cent of the attempted replications led to results which were statistically significant. Further, the average size of the effects found in the replicated studies was only half that reported in the original studies. …

Either the original or the replication work could be flawed, or crucial differences between the two might be unappreciated. … So the strategy adopted by behavioural economists of choosing for themselves which bits of psychology to use seems eminently sensible.

On generalising behavioural economics:

The empirical results obtained in behavioural economics are very interesting and some, at least, seem to be well established. But the inherent indeterminacy discussed above is the main reason for unease with the area within mainstream economics. Alongside Misbehaving, any economist interested in behavioural economics should read the symposium on bounded rationality in the June 2013 edition of the Journal of Economic Literature. …

In a paper titled ‘Bounded-Rationality Models: Tasks to Become Intellectually Competitive’, Harstad and Selten make a key point that although models have been elaborated which incorporate insights of boundedly rational behaviour, ‘the collection of alternative models has made little headway supplanting the dominant paradigm’ (2013, p. 496). Crawford’s symposium paper notes that ‘in most settings, there is an enormous number of logically possible models… that deviate from neoclassical models. In attempting to improve upon neoclassical models, it is essential to have some principled way of choosing among alternatives’ (2013, p. 524). He continues further on the same page ‘to improve on a neoclassical model, one must identify systematic deviations; otherwise one would do better to stick with a noisier neoclassical model’.

Rabin is possibly the most sympathetic of the symposium authors, noting for example that ‘many of the ways humans are less than fully rational are not because the right answers are so complex. They are instead because the wrong answers are so enticing’ (2013, p. 529). Rabin does go on, however, to state that ‘care should be taken to investigate whether the new models improve insight on average… in my view, many new models and explanations for experimental findings look artificially good and artificially insightful in the very limited domain to which they are applied’ (2013, p. 536). …

… Misbehaving does not deal nearly as well with the arguments that in many situations agents will learn to be rational. The arguments in the Journal of Economic Literature symposium both encompass and generalise this problem for behavioural economics. The authors accept without question that in many circumstances deviations from rationality are observed. However, no guidelines, no heuristics, are offered as to the circumstances in which systematic deviations might be expected, and circumstances where the rational model is still appropriate. Further, the theoretical models developed to explain some of the empirical findings in behavioural economics are very particular to the area of investigation, and do not readily permit generalisation.

On applying behavioural economics to policy:

In the final part (Part VIII) he discusses a modest number of examples where the insights of behavioural economics seem to have helped policymakers. He is at pains to point out that he is not trying to ‘replace markets with bureaucrats’ (p. 307). He discusses at some length the term he coined with Sunstein, ‘libertarian paternalism’. …

We might perhaps reflect on why it is necessary to invent this term at all. The aim of any democratic government is to improve the lot of the citizens who have elected it to power. A government may attempt to make life better for everyone, for the interest groups who voted for it, for the young, for the old, or for whatever division of the electorate which we care to name. But to do so, it has to implement policies that will lead to outcomes which are different from those which would otherwise have happened. They may succeed, they may fail. They may have unintended consequences, for good or for ill. By definition, government acts in paternalist ways. By the use of the word ‘libertarian’, Thaler could be seen as trying to distance himself from the world of the central planner.

… And yet the suspicion remains that the central planning mind set lurks beneath the surface. On page 324, for example, Thaler writes that ‘in our increasingly complicated world, people cannot be expected to have the experience to make anything close to the optimal decisions in all the domains in which they are forced to choose’. The implication is that behavioural economics both knows what is optimal for people and can help them get closer to the optimum.

Further, we read that ‘[a] big picture question that begs for more thorough behavioral analysis is the best way to encourage people to start new businesses (especially those which might be successful)’ (p. 351). It is the phrase in brackets which is of interest. Very few people, we can readily conjecture, start new businesses in order for them to fail. But most new firms do exactly that. Failure rates are very high, especially in the first two or three years of life. How exactly would we know whether a start-up was likely to be successful? There is indeed a point from the so-called ‘Gauntlet’ of orthodox economics which is valid in this particular context. Anyone who had a good insight into which start-ups were likely to be successful would surely be extremely rich.

One comment

  1. There are elements of this review I am sympathetic with but I would question a couple of key points Ormerod makes eg:

    “So the strategy adopted by behavioural economists of choosing for themselves which bits of psychology to use seems eminently sensible.”

    Well, no. It doesn’t follow that those parts of psychology picked by economists are any sounder scientifically than the other parts of it, many of which (as he notes) fail to replicate. Economists are just as bad at replication as psychologists!

    “Misbehaving does not deal nearly as well with the arguments that in many situations agents will learn to be rational. …no guidelines, no heuristics, are offered as to the circumstances in which systematic deviations might be expected”

    It’s easy to turn this around: no guidelines and heuristics are ever offered for when the rational model is appropriate. Furthermore, no mechanism is offered for how ‘irrational’ agents would come to be ‘rational’ as economists define it. A priori there is no reason to expect either ‘rationality’ or ‘irrationality’, since there is no clearly defined domain for either.

    I also wonder what he makes of the work of Gigerenzer, which has done a much better job than either rational or ‘behavioural’ models in the lab.

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