Letter to a Well-known Economist

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.

No decision is ever “irrational”; but many are cases of acting on other than prudential reasons.  Traditional economic “rationality” is in fact the assumption that 1) agents act solely on prudential value, and 2) value is carried by outcome.   Outcome is one aspect of behavior; choice is properly analyzed as choice of behavior, not outcome. When all the other variables of  alternative actions are equal, and the only value of interest to the agent is prudential, the decision reduces to classical rationality.  The apparent rationality of markets, when present, is the result of the integration of the other values over a large group of actors “averaging out” to zero.  Classic “rationality” is thus a special case of actual decisions involving all the facets of the behaviors being chosen among, just as Newtonian mechanics is a special case of relativistic mechanics.

The appearance of irrationality is the result of analyzing incomplete, defective, descriptions of the behaviors, the most common case being omission of the wider significance of the actions, that is, what the agent is doing by doing the specifics. For example, Kahneman and Tversky’s experiment that supposedly illustrates the “framing effect,” namely that agents make different choices when treating an epidemic as “framed” as saving people or letting them die, actually illustrates a very different fact about persons and decisions: the two “frames” are not frames of the decision; they are the decision. In one case the choice is which way save people, in the other case the choice is which way to sacrifice people.  Those are two different actions; it is an error to suppose that the decision is how many to save/let die; the decision is what to do, not  a choice of outcome. Outcome is one of several facts that the agent acts on.

The paper fully incorporates the full range of social factors, as well as individual ones, involved in a decision, and shows exactly the relationship between identity, community/cultural membership, and individual choice.  From a brief perusal of your site on macroeconomics and decision-making, it appears to have considerable relevance to that topic.

This entry was posted in Behavioral Economics, Economics, New Paradigm, new paradigm for economics and behavioral economics and tagged , , . Bookmark the permalink.

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