Behavioural Economics under attack

Tim Harford writes :

A simple summary of behavioural economics – I’ve borrowed this one from The Guardian – is that it is the study of “how people actually make decisions rather than how the classic economic models say they make them”. But this approach is now under attack, from Gerd Gigerenzer, a psychologist, and Nathan Berg, an economist, and they argue that behavioural economics is not nearly as realistic as its boosters claim. While it does study what decisions we make, the very last thing it does is study how we make them – and as a result it is even more wedded to silly accounts of the way human beings think than its neoclassical rival.

Neoclassical economics has often relied on the “as if” defence, published in 1953 by Milton Friedman, who argued that while people don’t actually solve complex neoclassical optimisation problems in real time, they still behave as if they do, somehow making rational decisions thanks to a combination of experience and cognitive short-cuts. But economists have been strikingly incurious about what those cognitive short-cuts actually are. Gigerenzer is not.

Behavioural economists point out cases in which our decisions don’t match neoclassical theory, and thus the “as if” defence fails. But Gigerenzer and Berg complain that behavioural economists have retained the neoclassical incuriosity about why we act as we do. Instead, they have modified the neoclassical model until its predictions fit our observed choices, and then fallen back on the same “as if” story.

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