Tag Archives: Behavioural

Thinking, long and hard

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Behavioural economics is very much in the news. Tim Harford takes a slightly skeptical look at it in the Financial Times today. In a recent post Chris House noted that few young researchers were taking up the baton, and anyway there are relatively few significant papers in the field. These have followed (in my order of reading) a rather intriguing OECD blog post by Vela Velupillai distinguishing between classical and modern behavioural economics (CBE and MBE). The classical version, from Herbert Simon’s 1953 paper, A Behavioural Model of Rational Choice, onward, is presented as more radical because it assumes no preference ordering and where there is no optimising but rather satisficing. Prof Velupillai writes:

“MBE concerns the behaviour of agents and institutions in or near equilibrium; CBE investigates disequilibrium or non-equilibrium phenomena…. MBE accepts mathematical analysis of (uncountably) infinite events or iterations, infinite horizon optimisation problems and probabilities defined over s-algebras and arbitrary measure spaces; CBE only exemplifies cases which contain finitely large search spaces and constrained by finite-time horizons.”

I have no idea what an s-algebra is, but the point is clear – as the post continues:

“Though the behavioural models do consider more realistic psychological or social effects, economic agents are still assumed to be optimising agents, whatever the objective functions may be. In other words, MBE is still within the ambit of the neoclassical theories, or is in some sense only an extension of traditional theory, replacing and repairing the aspects which proved to be contradictory.”

This is interesting in the light of having read recently Gerd Gigerenzer’s [amazon_link id=”0141015918″ target=”_blank” ]Gut Feelings[/amazon_link], which one could sum up as being about the rationality (in the sense of using mental resources efficiently) of non-rational (in the sense of calculating) decision-making via the use of rules of thumb. Gigerenzer takes issues with precisely the frequent behavioural econ assumption that decision-making is done as in the rational choice framework except with biases. Not always – Kahneman’s [amazon_link id=”0141033576″ target=”_blank” ]Fast Thinking[/amazon_link] clearly overlaps with the use of rules of thumb.

[amazon_image id=”0141015918″ link=”true” target=”_blank” size=”medium” ]Gut Feelings: Short Cuts to Better Decision Making[/amazon_image]

[amazon_image id=”0141033576″ link=”true” target=”_blank” size=”medium” ]Thinking, Fast and Slow[/amazon_image]

Fascinating territory. I need to think, not fast or slow, but long and hard about this.

Goodbye to rational economic man

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A few weeks ago a Very Important Policymaker recommended Gerd Gigerenzer’s [amazon_link id=”0141015918″ target=”_blank” ]Gut Feelings[/amazon_link] to me. It’s a fascinating book, and fascinating to know as well that at least one important policy organisation is taking decision-making so very seriously.

[amazon_image id=”0141015918″ link=”true” target=”_blank” size=”medium” ]Gut Feelings: Short Cuts to Better Decision Making[/amazon_image]

At first glance, this book is in the vein of the many behavioural psychology books that have so interested economics in recent years – for me Daniel Kahneman’s [amazon_link id=”0141033576″ target=”_blank” ]Thinking, Fast and Slow [/amazon_link]is the best. Jan Zilinsky posted a great list of them on Quora. The book discusses some similar issues, such as biases and framing. However, it also poses a challenge to the behavioural consensus, which always presents actual decision-making as a departure from the ideal of rational calculation. The aim of ‘nudging’ is to make people choose in ways that mimic rational economic man. What Gigerenzer argues is that the reliance on intuitive (fast) decision-making is often optimal: it not only saves on the energy needed for calculation, it also produces better outcomes than rational calculation.

For example, if asked to say which of Detroit or Milwaukee has the bigger population, Americans will be more often wrong than Europeans who don’t know the answer but have probably heard of Detroit – they rely on a recognition rule-of-thumb (if you’ve heard of it, it’s more important), whereas Americans who recognise both try to figure it out from other knowledge they have about the two cities. In an uncertain environment, it is better not to have full information – complex detail is good for explaining with hindsight but not for prediction. Some lack of knowledge is optimal -to take advantage of the recognition heuristic.  “In an uncertain world a complex strategy can fail exactly becaue it explains too much in hindsight. Only part of the information is valuable for the future, and the art of intuition is to focus on that part and ignore the rest,” Gigerenezer writes.

He describes a number of rules of thumb based on ‘evolved capacities’ such as language, recognition, object tracking,  memory, and emotions. These have come about because of both natural selection and cultural transmission. Using a rule of thumb requires two processes – in this example, recognition followed by evaluation – should it be applied to the present situation. The book spends a good deal of time on the recognition heuristic, which it sees as being behind the prevalence of brand advertising. Strong brands cause the recognition rule of thumb to kick in. Gigerenzer argues that this means, “If consumers can only tell the difference between competing brands by name, then there is little economic justificaiton for the idea that more choice is always better.” I admit to being intuitively resistant to this idea, but it obviously deserves careful thought.

The book also insists that we can’t analyse behaviour only with reference to personality or psychology – environment matters too. They are the two blades of the pair of scissors. This means there is great variability in human behaviour, something social scientists certainly ought to embrace. However, much economics looks for universally and permanently valid models. Here, my intuition is with Gigerenzer; our analysis needs to become far more context specific, looking at history and geography, and the interplay between economics and politics.

Gut Feelings is very clearly written and thought-provoking. I commend it to anybody interested in decision making and behavioural economics.

i also recommend my plane reading earlier this week, a rip roaring thriller set in the dysfunctional capitalism of modern Russia, Martin Baker’s [amazon_link id=”1783520019″ target=”_blank” ]Version 13[/amazon_link]. I can see the movie  in my mind’s eye.

[amazon_image id=”1783520019″ link=”true” target=”_blank” size=”medium” ]Version Thirteen[/amazon_image]