Sunday, January 30, 2011

Economics and the Rational Person

Being in the cognitive sciences, I hear a lot about how economics tends to ignore irrationality in people. Maybe it's the availability heuristic*, but I thought that biases are so well known that most economists had gotten over it.

I've been listening to the Freakonomics podcast, and I generally I like it, but I can't believe how much they buy into this "rational man" hypothesis.

I know that economics is its own science, with its own problems and methodologies, so I don't want to be too harsh, but sometimes they sound like psychologists that have only one theory: that people respond rationally to incentives. Even the way they pose problems reveals this: "How can we change incentives to make politicians act for the public good, rather than just their own?" This irritates me, because it presupposes what form the answer will take.

The field of economics endeavours to study how people deal with scarce resources. I think this is a great subject matter. I also think that economics has a lot to teach cognitive science, and I wish the two fields communicated more. However, any field that is based on a theory, which does not hold in all cases, is doing itself a disservice. It's like saying "we study human behaviour when resources are scarce. Oh, and by the way, the only thing we will consider that could affect behaviour are incentives."

I just listened to a story about how competition has been successfully used to innovate. Well, okay, but they don't mention that competition often stifles creativity. Fear reduces divergent thinking.** This is important, because it limits the usefulness of competition, as a tool, when innovation is the overall goal.  

* People use the ease with which something is brought to mind as a measure of how common or probable something is. It's problematic because it's easier to recall lurid and sexual things, and because the mass media doesn't give us a good representation of the world.

** I can't seem to find the reference for this. Anyone?

Pictured: I don't know, but what a great picture!

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Scootland Economics said...

but who is rational?

Anonymous said...

Picture: The Golden Temple in Amritsar, Punjab!

Anthony Francis said...

This comic seems made for your post:

"I don't understand. None of your actions have any potential profit motive. You're not possible!"

"And yet here we are, pointing science guns in your face. Evidence supports my hypothesis that you are in deep doo doo".