Richard Thaler‘s Misbehaving may be one of my favorite academic books. The author packed the book with interesting thoughts, covers numerous important ideas, and even is amusingly candid about his colleagues. Over the coming months, I’ll occasionally cover his key points (see here and here). In this post I’ll discuss “the gauntlet”; a list of predictable attacks on behavioral work trotted out by those wedded to traditional economics. None of the items in the gauntlet are completely invalid. The problem is their mindless repetition that is annoying. To be clear the gauntlet is more like a mantra than a thoughtful critique.
Attacks On Behavioral Economics 1: Who Cares About Decision Making?
Firstly, some economically trained scholars dismiss the idea of decision-making mattering. They insist that we can model “as if” people did all the necessary calculations to make the perfect decision. To this view if models predict well it is fine if the assumptions are silly.
I worry about that because if you don’t know what is really happening your model will predict well only until it fails to do so. What is more, you can’t possibly predict when your predictions will suddenly fail. Thaler dismisses the critique with another argument.
If we are going to have useful theories about how typical people shop…those theories had better not assume that people behave as if they were experts.
Thaler, 2015, page 47
Attack 2: Incentives
The next item is incentives. “If the stakes are raised, the argument goes, people have greater incentives to think harder…” (Thaler, 2015, page 47). This can be true in some situations but there is no general evidence that increasing stakes improves all decisions. Some of our worst decisions come when we panic under the pressure of huge stakes.
Attack 3: Learning
Finally, my personal bugbear is learning. Yes, people can sometimes learn. Yet, of course, sometimes learning doesn’t always happen. Many important decisions don’t give you much chance to learn. You can’t be expected to learn everything you need to about buying houses if you only do it a few times in a lifetime.
Thaler’s complaint about “Markets: The Invisible Handwaive” is funny. Markets can do amazing things yet they only work well in certain situations, not in others. A good behavioral paper will discuss how markets might change behavior but we can’t assume that competitive markets have magical properties that eradicate any behavior that economists don’t approve of.
Read: Misbehaving: The Making of Behavioral Economics, Richard Thaler, WW Norton, 2015.
