Economists Do It With Models

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In Case You Are Curious As To What It Is That I Study…

May 8th, 2009 · 13 Comments
Behavioral Econ

According to my bio page, I study behavioral economics. It occurred to be recently that it’s not necessarily obvious to the average person, or even to one who has studied economics, what this means. So I will try to explain, and I think a lot of you will find satisfaction in the fact that there are academics out there addressing the objections you may have had to the models presented in your Econ 101 courses.

You can think of behavioral economics as, in a way, at the intersection of economics and psychology. You see, traditional economic theory assumes that people are perfectly rational, patient, computationally proficient little economic robots that know objectively what makes them happy and make choices that maximize this happiness. (Even if traditional economists acknowledge that people aren’t perfect utility-maximizers, they usually argue that the deviations are random rather than showing evidence of consistent biases.) Behavioral economists know better- they aim to develop models which account for the facts that people procrastinate, they are impatatient, they aren’t always good decision-makers when decisions are hard (and sometimes even avoid making decisions altogether), they go out of their way to avoid what feels like a loss, they care about things like fairness in addition to economic gain, they are subject to psychological biases which make them interpret information in biased ways, etc. In my opinion, these deviations from traditional theory are necessary if economists are to understand empirically how people make decisions about what to consume, how much to save, how hard to work, how much schooling to get, etc. Furthermore, if economists understand the biases that people exhibit that lower their objective happiness, they can put on a bit of a presciptive hat in either a policy or a general life advice sense. (See Thaler and Sunstein’s Nudge for a good example of this.)

In short, you can think of the following analogy that I came across in my grad school reading in order to understand the role that behavioral economics plays: Traditional economics describes how an expert pool player does (or rather should) shoot pool. Behavioral economics desribes how the average person shoots pool. To further shed light on the issue, Foreign Policy has put together a nice little timeline of the (relatively short) history of behavioral economics:

Cool, huh? You know you wish you could be me. :)

Tags: Behavioral Econ

13 responses so far ↓

  • 1 Michael Hash // May 8, 2009 at 7:24 pm

    When you construct a model from the behavioral approach, how do you value the assumptions necessary in a model on things that are not easily quantified, like fairness or impatience? What tools from psychology help you in formulating the model?

  • 2 David Plumb // May 10, 2009 at 8:19 pm

    Out of curiosity, where are you studying behavioral economics? I’m applying to graduate programs in economics next year – and I’ve been checking out schools that have a concentration in it because I’d like to have that option.

  • 3 Fred // Sep 8, 2009 at 8:20 pm

    I believe that Jodi is at Harvard. Click on her Facebook page to verify.

  • 4 Fred // Sep 11, 2009 at 5:23 pm

    I love the statement, ” You see, traditional economic theory assumes that people are perfectly rational, patient, computationally proficient little economic robots that know objectively what makes them happy and make choices that maximize this happiness…” because it is a myth that people are rational…etc. I can see this by the people in my life and I point the finger back at me mostly!!

    Love your teaching. Please keep it up.

  • 5 Mike // Nov 26, 2009 at 11:50 am

    I once wanted to be an economist. But I felt that the traditional economics only looked at one side of the equation.

    It’s great that people like you are filling the gap and make economics a more rich discipline of thoughts.

  • 6 JW // Jan 12, 2010 at 3:37 am

    I was just curious where you went to get your Masters? I looked for Masters programs with behavioral economics but kept running into political economics, which employs fewer models for modern day decision making.

    I ended up getting my degree, but have really only used it to disprove all that it preaches.

  • 7 Behavioral Economics, Correspondence, Bohr, Hayek, and Keynes | The Incidental Economist // Jul 23, 2010 at 6:28 pm

    [...] of the relationship between behavioral and traditional microeconomics: First, the divide between behavioral economics and traditional microeconomics is not nearly as wide or as clear as [the Loewenstein and Ubel [...]

  • 8 sana // Sep 2, 2010 at 5:00 am

    i’am curious to know which univerties offer behavioral economics as a undergraduate course?

  • 9 Michael Nuwer // Oct 3, 2010 at 10:09 am

    Econgirl writes: “You see, traditional economic theory assumes that people are perfectly rational, patient, computationally proficient little economic robots that know objectively what makes them happy and make choices that maximize this happiness. ”

    In economics rationality is not an assumption about people, it is a methodological stance. Economic theory is not concerned with people; “agents” are the rational choosers, not real human beings. Economists use rational individual choice to derive results about the behavior of groups, not the behavior of individuals. Gary Becker makes this point clear in his Nobel Lecture.

    Mainstream economic theory seeks to identify the limits which economic phenomena impose upon the range of human activities. It does not seek to identify the manner and degree in which the economic interest shapes the general scheme of life.

    As Fritz Machlup noted long ago, even if the theory isn’t as predictive as we might like, it does not follow that it is wrong; only that it is inapplicable. In my view mainstream economics, and its core theory of rational individual choice, is inapplicable, not because it employs unrealistic assumptions about people, but because it systematically excludes a wide range of social interactions.

    Behavioral economists will fail if they continue to claim that the rationality assumption is unrealistic.

  • 10 Carolina // Jun 14, 2011 at 10:15 pm

    I love the idea of this site! Good job! I wish I had come across it while I was an undergrad studying economics at UCLA! I would have felt a little bit more encouraged/motivated/empowered.

    I want to start a site (un-related to economics) and was wondering if you had to ask for permission to take photographs showing the book covers of your economics books? Thanks for letting me know. I appreciate it. Good luck with everything!

  • 11 jonn2 // Jun 15, 2011 at 1:35 am

    comment2,

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