As someone who, obviously, is deeply interested in the relationship between human behavior and economics, I bring to your attention a recently published paper by myself and a colleague, Dr. Anthony Putman, which appeared in The Journal of Behavioral Finance, Vol. 14, Issue 3, 2013, entitled, “The Irrationality Illusion: A New Paradigm for Economics and Behavioral Economics”: http://www.tandfonline.com/doi/abs/10.1080/15427560.2013.790388?journalCode=hbhf20#.Ulw4utK3-ZA
The paper resolves the conflict between “rationality” and “irrationality” in economics, showing how an economic agent’s decisions are 1) in all cases a decision of what to do, i.e., what action to engage in, not the a decision of outcome, the traditional “basket of goods” approach, and 2) an agent’s decisions reflect all their reasons to engage in the various (perceived) available behaviors, including not only prudential (the traditional wealth-related ones) but all the other kinds of reasons: ethical, esthetic (in the sense of fittingness or appropriateness), and hedonic. Continue reading
The latest IPCC (Intergovernmental Panel on Climate Change) report says that it is “95% likely” that the main cause of global warming in the last 50 years is human activity. That sounds like it’s a probability, just as when you read that you have a 1/175,000,000 chance of winning the Powerball. The problem is, it’s not. Continue reading
Joe and I are proud to announce that our paper “The Irrationality Illusion: A New Paradigm for Economics and Behavioral Economics” has (finally!) been published by the Journal Of Behavioral Finance. Here’s a link to the Journal’s online edition (first 50 people to click through get the download free!):
Joe Jeffrey and I worked for over a year on a follow-up to our paper “The Irrationality Illusion” (which was published just yesterday in the Journal of Behavioral finance!) The working title was “The Problem With Probabilities”; in a fit of clarity the final version was named: “Subjective Probability in Behavioral Economics and Finance: A Radical Reformulation”.
Here’s a pre-publication copy for your enjoyment. Feedback is always welcome.
The paper Joe Jeffrey and Tony Putman have been working on (and posting early portions of here) is complete. “The Irrationality Illusion: A New Paradigm for Economics and Behavioral Economics” has been submitted for publication. A pdf copy of the paper as submitted can be found here:
Any and all comments on the paper are welcome at this blog.
Our purpose here is to formulate a new paradigm for economics, not discuss behavior in general, and we therefore must identify where money fits in the conceptual framework. Money appears in Intentional Action in several places: Continue reading
Our Principle 1 says that “Choice is choice of behavior.” What exactly do we mean by “behavior”?
We would ordinarily expect to look to the field of psychology, the study of what people do and why they do it, to find an accepted definition of behavior, just we would look to physics to find an accepted definition of energy or momentum. Unfortunately, we cannot do so. In the field of psychology today there is no commonly accepted definition of behavior. Continue reading
If, as we assert, choice is always choice of behavior, why then do we so often hear: “I had to choose between the blouse and the shoes,” “We had to choose between a home addition and college tuition,” “I bought the store brand milk because it was cheaper,” etc. – that is, language that clearly indicates making a selection from among the available goods and services? We hear this because in some cases the choice of behavior is a choice of two purchasing behaviors: purchase product X or purchase product Y (the classic “basket of goods”). In this case, purchasing is the activity, and product X or product Y is the particular instance of what is purchased, and common parlance, “He chose X vs. Y.” The new principle encompasses such traditional economic choices but also such choices as, “They chose to go on an extended vacation instead of buying the car (an activity vs. a product),” “They chose a vacation in South America vs. one of the same length in Europe (two versions of the same action), and “He spent $1000 to visit his grandchildren” (an intrinsic practice) [Abelson 1996]. In other words, choosing one product vs. another is a special case of choosing what to do.
The fact that the picture resulting from the deletion of almost all the facets of human behavior is seriously incomplete is a longstanding observation by economists and others. Mill  contains the following description of the logic of the situation: Continue reading
The framework of the new paradigm consists of seven principles:
- Choice is choice of behavior.
- By “behavior,” we mean intentional action.
- The paradigm case of human behavior is deliberate action.
- Behavior choices are made in light of the individual’s reasons to engage in one behavior or another.
- People choose what matters to them.
- Every behavior is an instance of engaging in a social practice of a community.
- For any person, a particular state of affairs may be real, actually possible, or merely possible.
The basic approach and certain of these principles (particularly Principles 2, 3, and 6), along with a slightly different formalism, were presented in (Jeffrey 2010a) as the homo communitatis paradigm. This paper may be regarded as a more complete articulation of homo communitatis.
The first principle of the new paradigm for economics is:
Principle 1: Choice is choice of behavior.
Fundamentally, persons choose behaviors, not products or services. This is perhaps the most fundamental shift involved in the new paradigm: a change in focus from the traditional concept of choice of goods and services to choice of behavior(s) by persons or groups of persons. Initially this may seem to be a semantic fine point, but is not; it is the anchor for including a much wider range of factors and influences, both traditionally “economic” and others, that influence, often in major ways, both the production and consumption of goods and services.
For an example of the difference this shift makes, let’s examine what is known in economics as the Friedman-Savage “paradox”.
The Friedman-Savage “paradox” is this: given that people are loss-averse, why do they buy both fire insurance (which has a positive expected value) and lottery tickets (which have negative expected value)? Continue reading
Behavioral economics, as the field stands today, consists of standard neoclassical economics with several “psychological” factors grafted on to account for some, though by no means all, of the failures of the neoclassical model. The result is an ad-hoc collection of concepts and factors that are basically disconnected, standalone concepts. Each is a “kluge” – an engineering term for a certain kind of ad-hoc solution to a problem: one that works but is otherwise a poor fit with the structure it has been grafted onto.
Because of this ad-hoc structure, or lack of it, it is difficult or impossible to identify and articulate relationships (causal or otherwise) between various phenomena, to identify which ones influence or account for others, or, perhaps most importantly, to identify and develop new extensions to the theory. For example, a variety of economic phenomena are known to be affected by several societal factors often grouped together as “social norms” (Ariely 2008), but behavioral economics includes no articulation of the connection between these factors and others such as framing, loss aversion, and deviations from Bayesian probability assessments ascribed to cognitive processes. We know, for example, that various political, psychological, and social factors lead to certain actors engaging in the behavior of suicide bombing, which cannot be justified by any form of the neoclassical model, but which also cannot be explained or predicted by any existing “behavioral” additions, unless the concept of subjective utility is arbitrarily expanded to include identity and social group values – extensions that are perfect examples of kluges. Continue reading