Wednesday, May 27, 2015

Evidence-based economics going mainstream

Misbehaving. The making of Behavioral Economics

Once upon a time there was a scientific discipline created under the assumption that people choose by optimizing and that choices were rational (unbiased).
This premise of constrained optimization, that is, choosing the best from a limited budget, is combined with the other major workhorse of economic theory, that of equilibrium. In competitive markets where prices are free to move up and down, those prices fluctuate in such a way that supply equals demand. To simplify somewhat, we can say that Optimization +Equilibrium = Economics. This is a powerful combination, nothing that other social sciences can match.
All these core premises of economic theory began to be under scrutiny four decades ago, with the contributions of Kahneman and Tversky on Prospect Theory and what we call right now  "Behavioral Economics". Richard Tahler in his new book "Misbehaving. The making of Behavioral Economics" describes the whole history with the privilege of being on the forefront since the very begining. That's why this book is of interest. Last year another book appeared on the same topic, with a formal view: Behavioral Economics, a history. Thaler's book is of much more interest, though you can skip some details on anecdotes from several chapters. His focus on financial issues is understandable, as long as he has done most of this work in this area. However, other issues deserve more attention.
Anyway, a must-must read book. Just in the final chapter he focuses on changing the title, and he talks about evidence-based economics, rather than behavioral economics. For a health economist, this option sounds closer, since evidence-based medicine had a similar development four decades ago.
Much has changed. Behavioral economics is no longer a fringe operation, and writing an economics paper in which people behave like Humans is no longer considered misbehaving, at least by most economists under the age of fifty. After a life as a professional renegade, I am slowly adapting to the idea that behavioral economics is going mainstream. But the process of developing an enriched version of economics, with Humans front and center, is far from complete.
PS. NYT review.
PS. Misbehaving site.
PS. On Bitcoin creator: "some even suggest Nash could be Satoshi Nakamoto himself". Glups?

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