Tuesday, March 21, 2006

Biases and assumptions

I very much enjoyed this post on happiness research, which details the Fallacy of Assymetric Idealization. It's in response to the conclusions some people jump to when reading about behavioral economics, and the very real limitations of the forward looking rational utility maximizer used in neo-classical (or Chicago school) economics.

This article, for example, is a good summary of behavioral ec. Even allowing for some artistic license, it concludes with this clunker:
There are many political implications. We have had 30 years of deregulation in the United States, freeing up markets to work their magic. “Is that generally welfare-enhancing, or not?” Wanner asks. “Framing can call that into question. Everyone agrees that there’s informational asymmetry—so we have laws that ensure drugs are tested, and truth-in-advertising laws. Still, there are subtle things about framing choices that are deceptive, though not inaccurate. We have the power of markets, but they are places where naive participants lose money. How do we manage markets so that the framing problem can be acknowledged and controlled? It’s an essential question in a time of rising inequality, when the well-educated are doing better and the poorly educated doing worse.”
The fallacious assymetric idealization here is that individual actors in a government committee will be wiser and better than individual actors in the market because individual actors make bad choices. The assumption is that government committees somehow raise intelligence and produce better decisions, when evidence to the contrary is only as far as the next visit to the DMV. Or FEMA. Or any major bill passed in the last 40 years. &c.

Behavioral economics is interesting and the points it raises are quite valid. However, they are neutral on the subject of government intervention because they talk about the limits of human beings, and last I checked, human beings operate government as well. That said, paying close attention to behavioral details will, I think, have a big impact on how people behave -- certainly larger than neo-classical economics would predict. Behavioral ec is good for implementation details, but I don't think it helps us consider well being, or makes a case for centralized decision making.


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