Tuesday, April 13, 2010

Ferguson's Takedown on Behavioral Economics

In the Weekly Standard, Andrew Ferguson notes the paradox of behavioral economics, that proving people are often irrational then begs the question as to why we think some subset of intellectuals or regulators are more rational:
Thaler, in a recent interview, said, “If there’s a regulatory philosophy in behavioral economics, it’s that we should recognize that people in the economy are human and that there are people out there trying to take advantage of them.” In this sense, behavioral economics is just conventional 1960s liberalism—and conventional 1960s economics, too—that assumes the free market itself is a kind of unending con game, with the smart guys exploiting the saps. As an advocate for the market’s hapless victims, the government has the responsibility to undo the con, a task that will require only the smartest administrators operating according to only the latest scientific research and making the most exquisite moral judgments.

You can see how useful the notion of irrational man is to a would-be regulator. It is less helpful to the rest of us, because it runs counter to every intuition a person has about himself. Nobody sees himself always as a boob, constantly misunderstanding his place in the world and the effect he has upon it. Surely the behavioral economists don’t see themselves that way. Only rational people can police the irrationality of others according to the principles of an advanced scientific discipline. If the behavioralists were boobs too, their entire edifice would collapse from its own contradictions. Somebody’s got to be smart enough to see how silly the rest of us are.

I would add for every quirky predictable irrationality for the masses--like the 401(k) default choice or bad toilet aim for men --there are offsetting irrational public policy fads such as Y2K, affordable housing goals, busing, the Iraq war, windfarms, ethanol, and global warming. As Reagan said, "The nine most terrifying words in the English language are: 'I'm from the government and I'm here to help.'"


J.P. said...

I found this talk by Charlie Munger quite interesting as a contrast to Thaler's overbearing paternalism. Even though Mr. Munger is discussing the same scientific results that are used to justify Thaler and co.'s paternalism, his way of using them is as a guide to how to question himself humbly and how to rid his corner of society of some pernicious behaviors through completely voluntary and consensual means.

This quote from Buffett reminded me quite strongly of Finding Alpha: "It's not greed that drives the world, but envy."

In My Hands said...

I've never understood that aspect of behavioral economics.

Succintly put, if people aren't rational, why would a regulator, who is ostensibly also a person, somehow more benevolent.


To this day none of the so-called explanations I've seen make a lick of sense...Sorry.

Foreigner said...

"I'm" counts as a single word?

Anonymous #5 said...

Succintly put, if people aren't rational, why would a regulator, who is ostensibly also a person, somehow more benevolent.


I have this crazy idea... hold on, hear me out here. It may be that people are rational... or it may be that people are not rational... or... wait for it... maybe sometimes people are rational and sometimes people are not rational...

Yeah, crazy right? But let me finish... Maybe the behavioral economists aren't saying that they're *automatically* right just because people are sometimes irrational, maybe they have additional arguments to support whatever position they are arguing at the time. Maybe behavioral economists get a lot of mileage out of the fact that the assumption of rationality does a lot of heavy lifting in economics. Perhaps in a world where people routinely make arguments like:

"We must live in the best of all possible worlds, because rational people rationally fix whatever problems that are possible to fix, QED"

the observation that people aren't rational is worthy of some attention.


Drewfus said...

@In My Hands
Succintly put, if people aren't rational, why would a regulator, who is ostensibly also a person, somehow more benevolent.

Indeed. However, this is the central tenet of Western political philosophy from Plato on down - that a tiny number special individuals can, when placed in the arena of public governance, reshape and control society for the common good, without being hindered by any of the greed or depravity that bedevils the rest of us.

This is an idea that is still going strong 2500 years after it was first put into print. Yes, the "chosen ones" know what's best for all of us and will govern (or rule) with total selflessness, dedicated only to the pursuit of the lofty goals. The very essence of the liberal ideal today.

It's time this idea - this style of thinking - was challenged head-on and questioned at every opportunity.

Anonymous said...

I agree with the spirit of this argument.

However, that we should be equating a misguided war in Mesopotamia, which cost the West trillions of dollars, alongside toilet aim techniques? . . .

The magnitudes my friend, the magnitudes. On the face of it, both are absurd policies in a statistically significant way. But one will be seen by history as far more costly than the other.

As long as behavioral economics remains the engine of quirky paperback sales and the occasional tweak to urinal policy, and nothing more, I can't see how it is comparable to the ideologies of 1960s social engineering of liberalism nor the 1980s rampant deregulations -- as both those were nothing short of massive utopian projects from the get-go.