Thursday, April 17, 2003

The Brain of a Rational Actor II

A while ago I wrote about how economics (seems to) struggle with people who have conflicting desires -- how do you explain an anxious dieter who padlocks the refrigerator, but then unlocks it to binge? In the end I said that "that people's desires come from biology as much as logic" and not to get caught up on the Spock-like connotations of the word "rational".

I chatted with Chicago behavioral economist Thaler yesterday during a class on how strong people's beliefs can be, and how folks can come up with all sorts of explanations for anomalous behavior. I then stumbled upon an essay by chemist/philosopher Michael Polanyi who writes eloquently about the same thing (via 2blowhards). (School buddy Stumbling Tongue also chimes in).

How does this tie together? A key question in Behavioral Economics is "how much does all this anomaly stuff actually happen where it matters?" Thaler does not know. Neoclassical micro would say it happens most where it is cheapest, that is, when the costs of getting things wrong are low, and if they are high, are paid by someone else. The examples that spring to my mind are public policy made after a traumatic event, surgeons recommending unpleasant, risky procedures, and academics, particularly in the social sciences and humanities.

Behavioral research also shows how new evidence tends to polarize belief based positions (Polanyi makes this point also). I used to wonder why people were so bad at micro, and now I know. Then I wondered why some people hated it, and that's pretty clear now too.


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