Thursday, July 18, 2013

Milton Friedman on Behavioral Economics Circa 1978

Ever since Freakonomics and Kahneman's Nobel prize, people have been writing articles about the radical new idea that people are not lightning-quick calculators complicated algorithms as economists always thought, but instead, real people! True enough, but it's useful to understand what rational really means, and why it's used so much by economists. Here's Milton Friedman (22:15ish) noting why it's basically about predicting what people do, on average, nothing more:

Also interesting, a fetching young Laura Tyson asks a question around 34:45. I think she's aged well too (Keynesians may be wrong, but they can be cute)


Unknown said...

You mention Kahneman, who claims to have found reliable patterns of irrational behavior. That contradicts Friedman's claim that if something is irrational, then it is unpredictable.

Also, how much does "rationality" predict? To be used in an economic theory you need to specify the preferences and choice set involved, and on these the set of constraints can be very weak indeed. Cfr. the Stigler/Becker article on De Gustibus Non Est Disputandum, where they argue that any behavior that seems to conflict with rationality will be found consistent with it if we only search long and carefully enough for the subtle details of the choice problem involved. As when cigarette smokers who "seemingly" get unwillingly hooked are actually (in Becker's rational addiction theory) only implementing a forward looking investment plan in their own tastes. Or his speculation that the obesity "epidemic" can partly be explained by people "anticipating medical solutions that will make weight gain less dangerous." (page 37 in )

Eric Falkenstein said...

I'm not sure what predictable pattern Kahneman found. He mentioned a lot of curiosities, but that's different than saying people generally pay too much for small probability risks or don't pay enough.
I would agree with Stigler that at some point it's really tautological, in that if people general do something, then they probably think it's in their best interest.

paul brakke said...

good post. Friedman IS the man. its funny though, "the more things change..."