Wednesday, October 20, 2004

Behavioural economics

Prof Bainbridge on behavioural economics.

I particularly agree with his point that even if we assume that beh. econ. has it right, public choice accounts of political decisionmaking are much harder to defeat. Furthermore, it is arguably more dangerous for someone in power to display irrational decision making processes, such as the availability heuristic, than a typical market actor.

I would also add that
1 - Austrian economics does not rely on the perfect information... stipulations that behavioural economists have such fun undermining. It is not hard to show that neoclassical man is unrealistic (even though that was largely the point of the model), but it is much harder to show how behaviourally enlightened bureaucrats can solve the problem, unless you assume that these bureaucrats are perfectly rational, but that defeats the whole point...
2 - in the West, we have done pretty well in the last 500 odd years in improving our living standards, despite supposed irrationalities. Perhaps we could have done better, but it seems that historical attempts to make us do better have failed spectacularly.

I can recommend Richard Epstein's last book as a defence of classical liberalism against beh. law + econ. I am quite happy to rely on an argument from authority - this is what Epstein thinks of beh law + econ:
...cognitive biases offer but another illustration of the basic Hayekian insight regarding the importance of decentralization in social affairs: the partitioning of responsibility ... functions as an error-correction mechanism.

The only practical implication of behavioral economics is to strengthen the case for private institutions

UPDATE
Will Wilkinson links to Prof Klein's response to an old Thaler + Sunstein paper on Libertarian Paternalism. Klein criticises Thaler + Sunstein for ambiguous (and/or deceitful) use of language, and, more usefully, emphasises the fact that the Hayekian research program is all about trying to deal with the "irrationalities" pointed out by the beh law + econ people. This is what really bothers me a bout beh law + econ: I read a lot of it for my thesis, and I don't remember coming across one decent discussion of the Hayekian research on limited information and the implication therein. One hopes this is nothing more than a temporary oversight (but I suspect otherwise, as does Prof Klein)
Here is a clever remark from the end of Klein's paper:What, then, are we to make of ‚ÄúLibertarian Paternalism‚ÄĚ? I suggest that Thaler and Sunstein suffer from deep biases. They sense the challenge of libertarian ideas, but react in a way that is anchored in the political statusquo and their own commitments to certain ideological ideas and values.

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