Sunday, June 14, 2009


From NPR's All Things Considered:

Using Psychology To Save You From Yourself

The three of them spent a year walking the hills of Stanford. Kahneman and Tversky taught Thaler about psychology; Thaler, in turn, taught Kahneman and Tversky about economics.

In the early '80s, they began to publish their ideas — an integration of psychological research and economics with this new flawed decision-maker at the center. But initially, mainstream economists largely rejected the work.

The main point of contention, says Thaler, was the suggestion that humans are less than perfectly rational when it comes to decision-making. For the majority of the 20th century, and for the most part even today, the human beings imagined by economists and placed at the center of their economic models have had a Spock-like rationality.

"Economists literally assume that the agents in the economy are as smart as the smartest economist," Thaler says. "And not just smart: We're not overweight; we never overdrink; and we save just enough for retirement. But, of course, the people we know aren't like that."

So why would economists assume that human beings are so hyper-rational?

Because using a rational human in their mathematical models works. For decades, economists have been using idealized humans to predict everything from international trade to market prices, and they've done pretty well. They've been able to figure out all kinds of things. Also, it's hard to include more realistic human behavior in an economic model.

Click here to listen to or read the rest.

Okay, so I wrote at length some years ago about the rampant flaws in reasoning and weird biases inherent to the "science" of economics, but here's the short version. While economics, as a field of study, has great value, there are some severe problems with the way economists work that become even bigger problems when laymen such as politicians and talking heads use their limited understanding of economics while implementing or discussing policy. That is, economics is popularly understood to be a "science," which is necessarily factually based, and carries the cultural weight that the real sciences do.

This is a big problem because economics is only "science" in the way that archaeology or psychology are sciences: the field uses an approach that could be deemed scientific, but actual scientists start with actual data, while economists use both data and assumptions. And many of those assumptions are just flat out wrong, which taints pretty much all conclusions based on them.

One of those faulty assumptions is that there is such a thing as a "free market." Without the government, there can be no market, but with the government, there can be no "free" market. Because the government must necessarily create the circumstances by which markets can exist, the government must always be intertwined with markets. You just can't get rid of it. The government is always going to be there because it's an integral part of the market.

This means that all economic pontificating about the wonders of the market are flawed at best, and plain wrong at worst. No argument can stand on an imaginary foundation.

Another faulty assumption tainting economic philosophy, which is probably a better word here than "science," is the concept of the rational consumer, which the above linked story goes into great detail refuting. But you don't even really need NPR to show you the obvious: if consumers were rational people, why does the advertising industry spend hundreds of billions of dollars yearly to get consumers to make choices based on images, music, personal association with celebrities, and being cool? That's right. Consumers are utterly irrational. And it's been staring us in the face all our lives.

Anyway, the point here is that the US power establishment makes countless economic policy decisions based on what they believe to be scientific truth. Economics, however, is not scientific truth; much of it is philosophy, sometimes good philosophy, sometimes bad, but philosophy nonetheless. That is, if one dares to challenge widespread conventional economic orthodoxy, one is not insisting that the Earth is flat.

We, as a society, have a lot of rethinking to do.