Friday, 14 January 2005


There’s an interesting article in The Economist (should be a free link) about neuroeconomics. They don’t mention it explicitly, but much of what they discuss is considered part of experimental economics as well. Here’s an excerpt:

ALTHOUGH Plato compared the human soul to a chariot pulled by the two horses of reason and emotion, modern economics has mostly been a one-horse show. It has been obsessed with reason. In decisions from how much to produce to whether to save and invest, humans have been assumed to be coolly rational calculators of their own self-interest. Over the past few years, however, evidence from psychology has persuaded many economists that reason does not always have its way. Now, judging from a series of presentations at the American Economic Association meetings in Philadelphia last weekend, a burgeoning new field dubbed “neuroeconomics” seems poised to provide fresh insights on how the two horses together produce economic behaviour.

The current bout of research is made possible by the arrival of new technologies such as functional magnetic-resonance imaging, which allows second-by-second observation of brain activity. At several American universities, economists and their collaborators in the neurosciences have been placing human subjects in such brain scanners and asking them to perform a variety of economic tasks and games.

(þ: OTB)


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[Permalink] 1. David Andersen wrote @ Fri, 14 Jan 2005, 6:26 pm CST:
"Over the past few years, however, evidence from psychology has persuaded many economists that reason does not always have its way."

Filed under “We needed a study to tell us this?”



It seems obvious, and it is, but economists begin with the assumption that people are “rational”, i.e. constrained utility maximizers. Most of the neoclassical paradigm is based on this assumption, and the most recent research is aimed at modifying the paradigm to include uncertainty, path-dependent behavior, and so forth.

[Permalink] 3. David Andersen wrote @ Mon, 17 Jan 2005, 2:22 am CST:

It’s good to hear the research is catching up with reality. I wonder what led economists to ever consider the “rational” hypothesis in the first place?



The assumption of rationality actually holds up pretty well, particularly in aggregate. Since utility isn’t actually observable, peoples’ spending patterns are used as a way to infer what they receive utility from.

It’s much more robust than this description makes it sound. In the distant past, economists were confused as to why people would donate to charity, and the notion of utility provides an explanation: they give to charity for the same reason they buy other items, it provides utility.

Most of the issues with the central premise of rationality comes from anomolies like path dependent behavior and conspicuous consumption, among others.

As for why economists ever believed this (and still do), see the works of Karl Menger. He started the marginal revolution in the 19th century which solved Adam Smith’s diamond-water paradox.

It’s not as bad as it appears.


Actually, that should be Carl Menger. Karl was his son.

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