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New Books, Behavioral Econ, And A Reality Show Pitch…

June 2nd, 2015 · 11 Comments
Behavioral Econ

Summary in Brief:

Richard Thaler has a new book:

John Cochrane has his Chicago-school panties all in a twist:

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.

Tags: Behavioral Econ

11 responses so far ↓

  • 1 Bob Flood // Jun 2, 2015 at 6:18 pm

    How about just saying; : “Learning is important and there are calculation costs.”

  • 2 Economist's View: Links for 06-04-15 // Jun 4, 2015 at 3:06 am

    […] New Books, Behavioral Econ, And A Reality Show Pitch… – Jodi Beggs […]

  • 3 Jeff L // Jun 4, 2015 at 6:17 pm

    I saw the title of the book and my first thought was,

    “Are you, miss, behaving?”

    Re: the article…

    “Note that the inflammatory quotes: …“Chicago School’s libertarian beliefs” … are his.”

    Is calling the Chicago economics department libertarian really inflammatory? But then, that was part of the point being made. Maybe I am accepting the critique critique uncritically?

    Re: sticky prices. This always seemed like a straw dummy objection to me:

    Uninformed person: “Well, if demand drops, then you can simply have 30% wage deflation, and 30% price deflation and you will just be back to where you are.”

    Mathematically aware person: “Sticky prices!”

    Rational Expectations – I think that rather than focusing on this problem with the Ergodic hypothesis, it might be more helpful to focus on “path dependence” in the sense that preferences are highly dependent on wage history.

  • 4 Jeff L // Jun 4, 2015 at 6:19 pm

    Edit: That was supposed to say:

    Mathematically aware person: (angle brace) Hmmm, I can either split the money supply into a “consumer” part and an “investor” part and l0ok at it as a dynamical system with larger pressures on wages being translated into smaller pressures on prices, which push workers and labor supply further into the left side of a V-shaped supply curve or …(close angle brace) “Sticky prices!”

  • 5 J.D. // Jun 5, 2015 at 4:24 pm

    “Shouldn’t that be the responsibility of those making said rationality assumption?”

    Nope. You haven’t read Friedman’s “The Methodology of Positive Economics.” Or, if you have, you’ve forgotten its main point. When it comes to the assumptions, whether or not they are they are precisely explained is irrelevant to whether the model makes reasonably accurate predictions.

    The burden of precisely defining the rationality assumption falls on those who seek to use it for their argument. And since the behavioralists are the one’s critiquing that assumption, they have the obligation to be clear about what specifically it is they are criticizing.

  • 6 econgirl // Jun 5, 2015 at 4:52 pm

    Doesn’t your last sentence not follow from the penultimate one? There is a big difference between explaining what assumptions are made as a starting point for a model and showing that said assumptions are realistic. I will acknowledge that a common position is that it doesn’t matter whether assumptions are realistic if the predictions are empirically valid. (This of course becomes problematic in situations where models are difficult to test.) But this doesn’t mean that the assumptions don’t need to be outlined.

  • 7 J.D. // Jun 5, 2015 at 5:08 pm

    The ultimate sentence follows perfectly. The neoclassicists say the assumption is irrelevant. Since it is orthogonal, the NCs don’t need to worry about what’s its boundaries are, or expend resources on outlining its boundaries. “[T]he relevant question to ask about the ‘assumptions’ of a theory is not whether they are descriptively ‘realistic,’ for they never are, but whether they are sufficiently good approximations for the purpose in hand.” See Friedman here: (go to page 80 in the pdf; read section III and passim of the paper).

    The behavioralists, on the other hand, claim that the assumption is bad/wrong. Since they claim the contours of the assumption matter (which is the positive statement), its their burden to delineate those contours, explain why they matter, and then show that the assumption is not orthogonal to the question (i.e., that the assumption does matter).

  • 8 Michael // Jun 25, 2015 at 12:13 am

    We’re still pretending that the Chicago School is about philosophy, rather than slavish devotion to the oligarchy?


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