What’s wrong with behavioural economics?
The next book of Ariely is about to be published. Since I was quite disappointed about two others of his books, I’m not motivated to read it. Fortunately this weekend the daily journal Trouw published a long interview with the author about his new book. And again, his answers are disappointing.
To illustrate my disapointment a few examples of experiments, which are discussed.
- A person has bought a theatre ticket in advance, and at the moment of entering the theatre, he discovers that he had lost the ticket. He decides not to buy a new one and turns back home. What makes this behaviour irrational? Many people in my neighbourhood, among them myself, chose this option, and came up with relevant motivations. A clear ‘no’ is an incentive to be more cautious with an expensive ticket. The person has a limited budget for cultural activities, and a ‘yes’ would mean that the person is out of budget control.
- A person has invested a lot of resources in his sport’s career. It seems that he will not reach his goals. Nevertheless, he perseveres – hoping for success in the end. He will never forgive himself not to have tried everything, and to have given up before the end. Ariely calls this behaviour irrational. I just admire this athlete.
- A female employee claims equal pay for equal productivity. So, if a male employee with the same education and the same experience and productivity earns 5,000 euros per month, she considers it fair to earn the same amount. Ariely calls this claim irrational.
- A woman is a recognised bargain hunter, and very successful in terms of self-respect and social recognition. Moreover, she hunts by walking an biking, which is a very healthy activity. Ariely is just counting amounts of money, and interpret some actions as irrational.
- A person buys a simple service, which takes about 5 minutes. Then is he confronted with a bill of 200 euros. His reaction is one of moral arousement: a simple activity, 5 minutes for 200 euros. Ariely calls this moral reaction irrational, although the reaction might be in accordance with the prevailing economic culture.
Behavioural economics considers phenomena as ‘loss aversion’ and ‘endowment effect’ as irrationalities. Especially poor people can’t afford large losses, and are willing to ignore a chance of winning much money, if it means that there is also a chance of loosing much money. In orthodox economics, which is the analysis of a world in which all people are homo oeconomicus, this is called a preference, a taste. The same with endowment effects: if a person has bought a beautiful table, and this table has played an important role in his family life, he might not be willing to sell this particular table for a relatively high price. Again, this is not irrational at all; Ariely and other economic psychologists simply don’t understand the minds of the people who takes these kinds of decisions. It also shows that economic psychologists have no clue whatsoever, what economists mean by the ‘homo oeconomicus’.
Most experiments in behavioural economics are questionable. There are two exceptions. One is illustrated by Romer (2000). Some people are allergic for peanuts, but they experience their smell as very attractive. So if there is a party, and the host puts peanuts on the table, many visitors cannot resist the temptation to take a few peanuts, and rationalise their behaviour: “a few peanuts are not that bad”. Later they regret their behaviour, but the next time they again take a few peanuts. The idea of designing many types of nudges to make it more difficult to eat peanuts is an interesting. (Thaler, Sunstein 2008). A second example is about framing. People who do not see that information is always framed in a particular way, are highly influenced by the way particular information is framed. It also holds for the framers. A neoclassical econometrician models an economy in such a way that the relationship between the wage rate and the level of employment is always a negative one. The model builder is just interested in the question whether the effect is weakly or strongly negative. If a post-Keynesian economist shows that in periods of depression the relationship is a positive one, the econometrician gets irritated and the post-Keynesian information is not stored in his mind and brain. This is typical for an irrational person: not being aware of his frame, and people with a different frame are just wrong (Keizer, 2015, 2017).
The design of the experiments is based on the assumption that all participants are homines oeconomici. The experiments show that many people behave different from what was expected from the homo oeconomicus. The conclusion is that people are irrational. But there are other reasons why people do not behave as hominem oeconomici. We need a careful analysis of the economic world, which models the behaviour of the homo oeconomicus. But we also needs an analysis of the social world, which models the homo sociologicus, and an analysis of the psychic world or mind, which models the homo psychologicus. Only if we integrate these three worlds, and place the integration in historical context, we can define important concepts such as irrationality and immorality. , and there interconnectedness.
Behavioural economics is meant to be a critique of the neoclassical economics. But by ignoring its axiomatic and isolated character, it is constantly missing the point. It leads to many odd conclusions. If behavioural economists are involved in government policy matters, it might even become a dangerous field of knowledge, when constantly calling preferences of people being irrational.
Keizer, Piet (2015), Multidisciplinary Economics, A Methodological Account, Oxford: Oxford University Press.
Keizer, Piet (2017), A Multidisciplinary-economic Framework of Analysis, Journal of Philosophical Economics, 2, November.
Romer, P.M., Thinking and Feeling, The American Economic Review, Papers and Proceedings 90 (2), p. 439-443.
Thaler, R.H., Sunstein, C.R. (2008), Nudge: Improving Decisions about health, wealth and happiness, New HVEN, Yale University Press.