What does an economics textbook have in common with a fairy-tale?
Hint: it’s not a trick question.
According to Richard Thaler–author of Misbehaving: The Making of Behavioral Economics—“most economists might as well be studying unicorns.” (Click here for his interview with Hidden Brain’s Shankar Vedantam, posted online under that title)
Thaler, behavioral economist-extraordinaire, reasons that the study of wholly rational people is nonsense–they simply don’t exist. As Hidden Brain put it:
We don’t always act like we’re supposed to. We don’t save enough for retirement. We order dessert when we’re supposed to be dieting. We use the tickets we bought to a concert even though we’re sick. In other words: We misbehave.
The hypothetical beings of traditional economics are known as “econs.” They act independently of factors like self control, sentimental value, and aesthetic preference. They are perfectly rational, acting solely to maximize their own utility and assumed to have infinite knowledge and computing abilities to inform their decisions. You wouldn’t want to play one in a game of pool.
Meanwhile, humans are vulnerable to an impossible number of irrational factors. We experience fear, attraction, guilt, and adrenaline. We draw on past experiences to inform new decisions. Unlike econs, we tend to ignore sunk costs, as proven by Daniel Kahneman, who won the Nobel Prize in Economics while collaborating with Amos Tversky on this topic.
Behavioral economics shifts the focus to real people and real world scenarios, considering abstract ideas and social sciences along the way. The econ’s world, in contrast, sticks to the sterility of hard-sciences and mathematics.
Economist and Nobel Laureate Robert Shiller suggests that a phenomenon called “physics-envy” might be to blame:
Robert Shiller: I think that the economics profession suffers from physics-envy. I really do. We all wish we could be Einstein. It’s too strong a model, we can’t all develop the theory of relativity. The world of people isn’t like that.
Shiller then elaborates:
When you look at what happens for example in a financial crisis, you’ve got to get immersed in a lot of detail… what’s driving people, what’s on their minds, what they don’t know… what the people are assuming the government might do if such and such happens.
[Life] involves a lot of real world thinking which doesn’t fit with the Einstein model.
And it doesn’t quite fit with the econ model, either.
Thaler isn’t just joking around by calling the all-rational beings mythological. While it may be an inevitable hypothetical construction, the econ world can never really exist. The contrast between real human experience and what might as well be called econo-mythology makes a need for questioning obvious.
Behavioral Economics is outpacing traditional economic theory, re-thinking the way we study patterns in consumer spending, international trade, and even health and social interaction, and putting all of these behaviors in human terms.
“…and the econs lived rationally ever after.”