Summary in Brief:
Most of the Wall Street Journal review passes along Thaler’s of complaining about how people resisted his early ideas. Really, now, complaining about being ignored and mistreated is a bit unseemly for a Distinguished Service professor with a multiple-group low-teaching appointment at the very University of Chicago he derides, partner in an asset management company running $3 billion dollars, recipient of numerous awards including AEA vice president, and so on.
Note that the inflammatory quotes: “pure heresy” “blood boiling” “Chicago School’s libertarian beliefs” are his. “This was `treacherous, inflammatory territory,’ he writes.” He writes. An objective history of behavioral finance this is not. And news flash, we ask sharp questions at Fama’s seminars too.
On the up side, Cochrane’s blog is pretty aptly titled. I was asked one time in a job interview “Who would win in a bar fight- John Cochrane or Paul Krugman?” I answered Krugman because he seems far scrappier and has a lower center of gravity, and I think my money would be on Thaler for largely the same reasons. (In retrospect, I should have pointed out that Cochrane was vulnerable because he likely figured that if it was efficient for him to get his ass kicked it would have happened already.) Intellectually, I do think that Cochrane makes a few reasonable points, but I have some notes on behalf of the behavioral economists in the crowd:
- It was my understanding that the term “behavioral economics” was an attempt attempt at an analogue to “behavioral psychology” (as opposed to cognitive psychology) rather than a dig at traditional economics’ supposed lack of focus on human behavior. In any case, I don’t see how “psychological economics” is better (or really different), unless of course one believes that rational decisions aren’t made with one’s mind. Also, the term makes sense when you consider that experimental and other empirical study was far less common in regular economics when the behavioral term was coined than it is today.
- I’m not sure that setting up your own straw man is a good way to criticize someone else for attacking a straw man- behavioral economists know full well that people sometimes (often, even) behave in line with models of a perfect utility-maximizing agent. Furthermore, behavioral economists don’t think that traditional economists take the rationality assumption entirely literally, instead acknowledging that traditional economists just think that deviations from rationality aren’t systematic enough to affect outcomes at a market level. (This is why I particularly like the term “Predictably Irrational”, chosen by Dan Ariely as a book title.)
- In doing a google Image search for Thaler’s book cover, I came upon a side-by-side graphic of Thaler and Malcolm Gladwell, which helps convince me that Cochrane may be on to something with his stories point.
- I’m pretty sure that Cochrane was willfully ignoring the existence of most of Keynesian macroeconomics in his “cutenomics” section- if you want to think about where understanding the failure of the rationality assumption could have a large impact, how about potential explanations for sticky prices (especially downwardly rigid prices and wages), which are fundamental to Keynesian models? Yes, yes, Chicago school, I should not find this surprising…well then, how about the issue of how human psychology influnces the tax rates that government can get away with? Not very cute…or “cute.”
- Call me ignorant, but I was unaware until this post that the Chicago-school free-market ideology is founded on a presumption of government incompetence- I thought that that torch was carried almost exclusively by the Austrian school, so I guess I learned something. That said, I find it completely plausible that people exhibit stronger psychological biases when making choices for themselves than when making choices for others, which would imply that policymakers might be able to help people make less biased choices in some situations. (Heresy, I know.) I’m surprised that there isn’t more research on this.
- I really hope that Cochrane doesn’t actually believe what he wrote about the monthly versus lump-sum tax rebates, since it’s pretty obvious that what is seen as best for short-term stimulus purposes (i.e. getting people to spend) isn’t always the same as what policymakers would encourage for long-term planning purposes. I’d like to think that not believing in the efficacy of fiscal stimulus doesn’t preclude one from recognizing when such an approach is being attempted.
- Cochrane complains that behavioral economists have yet to lay out what exactly is meant by the assumption of rationality- shouldn’t that be the responsibility of those making said rationality assumption? Even if so, here’s a draft to use as a starting point.
- I’m not sure that a macroeconomist should criticize any field for not having all of the answers after 30 whole years- you know, glass houses and all of that.
I’m now off to pitch a reality show where the University of Chicago forces Cochrane and Thaler to be office mates. It could even play on the Real World tag line- you know, “behavioral economics is what happens when people stop being rational and start getting real.” Don’t even try to say you wouldn’t watch it.