Behavioral Economics is Bunk*: The “Why” and the How

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Behavioral economics (BE) was invented by a couple of very rich non-profit foundation heads and Boards of Directors as a personal and ideological agenda to defend the failed ideas of classical economics, mainly the rationality dogma of human behavior.  They accomplished this marketing and ideological goal by manufacturing false evidence supposdly proving that human behavior is “illogical.”  They were, and still are, such clever marketers and ideologues that one of the hired guns, Dan Kahneman, a pretend intellectual and social scientist.

Further, the childishly simplistic notions of “nudges” and behavioral management was grabbed by governments in the desperation of the economic meltdown.  Understandable.  The con men tell folks what they already believe and want to believe.

The power/ideological agenda of BE is deeply reactionary and conservative – to “prove” that humans are “irrational/illogical” and therefore justify dishonest policies called “nudges.”   But the evidence says differently.  Let’s examine that, shall we?

Below is some evidence for debunking the precepts and practices of BE.  Please disagree and debunk, with peer-reviewed citations.

The Idea of “Irrationality” Is Dum…but dum ideas always sell real well.

“Somehow economists became the experts on rationality.”

By definition, no behavior could have survived evolutionary “selection” and been “irrational.”  Irrational implies destructive and contrary to the well-being and selective advantage of the individual.  So, no, irrationality cannot be a biological trait of the human, or any other animal, phenotype.  Phenotype is all the physical stuff our bodies have and do.  Phenotypes are determined/caused by genetic and bio-mechanical processes.  That’s all.  All biological, all the time.

Is there self harming behavior, for an individual and others, of course!  Is it irrational?  In some time scale, yes, but in the moment of action likely not based on deep biological needs and drives.  But the clever trope of “irrationality” immediately categorizes individuals as crazy and justified targets for remediation, including lying and misleading ones – often called “nudges.”  Further, the simplistic and false notion of behavioral “irrationality” stops any problem analysis of deeper biological and medical. physiological processes where real individual remediation may actually solve problems.

“Irrationality” is just a smarmy way to say behaviors, and the people who do them, are “bad” and morally wrong.  Bingo.  Forget biology, medical facts, brain research, physiology or anything else.  Simple minded economic ideas from hundreds of years ago and policy, also all classical econ based, have all the answers.  Simple, just “give these bad ppl a little “nudge” – like getting them to pee better in urinals.  You know that story?

By classifying humans as the first, apparently, animal in the history of life to act “irrationally” consistently and especially when really important “decision” needed to be made.  The economists, awarding themselves their own pretend “Noble Prize”, offered everyone and esp governments a hermetically sealed answer to the growing behavioral problems of individual and social self-harming behaviors.  Bingo, well done that!!

The so-called evidence and studies supporting BE appear to be flawed:

Researchers at the University of Rochester have shown that the human brain—once thought to be a seriously flawed decision maker—is actually hard-wired to allow us to make the best decisions possible with the information we are given. 
 
Neuroscientists Daniel Kahneman and Amos Tversky received a 2002 Nobel Prize for their 1979 research that argued humans rarely make rational decisions. Since then, this has become conventional wisdom among cognition researchers.  Contrary to Kahnneman and Tversky’s research, Alex Pouget, associate professor of brain and cognitive sciences at the University of Rochester,has shown that people do indeed make optimal decisions—but only when their unconscious brain makes the choice.
 
“A lot of the early work in this field was on conscious decision making, but most of the decisions you make aren’t based on conscious reasoning…You don’t consciously decide to stop at a red light or steer around an obstacle in the road. Once we started looking at the decisions our brains make without our knowledge, we found that they almost always reach the right decision, given the information they had to work with.”
“We’ve been developing and strengthening this hypothesis for years—how the brain represents probability distributions,” says Pouget. “We knew the results of this kind of test fit perfectly with our ideas, but we had to devise a way to see the neurons in action. We wanted to see if, in fact, humans are really good decision makers after all, just not quite so good at doing it consciously.”
1 – see more extended quotes below.

Trying to Save the (Really) Bad Ideas of Economics – By Expensive Marketing- aka Lying

What the two big foundations did was to fund an apologetics for the idealistic, and really simplistic, Enlightenment ideas of classical and neo-classical econ departments.  Behavioral econ academics were paid, fairly well, to be lapdogs for the economics belief systems and ideologies.

The marketing strategy was to say to economists…Look, your ideas describe how people should behave  – the norm or normative.  To defend your ideas from factual and real-world anomalies, aka mistakes, we’re going to document the deviations from the norm and come up with simple little things to say and do to move people back to your classical econ norm.

Here is a quick description of the purposeful strategies:

“The main contribution of the Alfred P. Sloan and Russell Sage Foundations’ behavioral economics program (1984–1992) was not the resources it provided, which were relatively modest. Instead, the program’s contribution lay in catalyzing “a sense of mission” in the collaboration between psychologists Daniel Kahneman and Amos Tversky, economist Richard Thaler, and their associates. Partly this reflected the common strategy of American foundations to pick an individual or small group of scientists and stick with them until scientific success had been achieved. But moreover, it was a consequence of the careful management of the program’s director Eric Wanner. The various actors involved in the behavioral economics program constructed a new behavioral economic sub-discipline in economics by tapping into existing missionary sentiments in the economic and psychological disciplines, while at the same time actively shaping this sense of mission.”

[In 1983–84] behavioral economics essentially did not exist. Kahneman and Tversky had written their Econometrica paper on prospect theory, but not very many economists had taken much notice. There was no dialogue between psychology and economists, and there hadn’t been since Herb Simon’s days as an economist. Now much of the credit for what has happened since must go to K&T who were so brilliant that economists simply could not ignore them. But I think that the value of the Sloan-Sage program should not be neglected. Simply by having such a program, a sense of mission was created (Thaler’s letter to Wanner, 27 May, 1992, Rockefeller Archive Center [hereafter RAC], emphasis in the original) As much as rewarding psychologist Daniel Kahneman (b. 1934), the Nobel memorial prize in economics in 2002 was a celebration of his and Amos Tversky’s (1937–1996) scientific achievements, it was a recognition of the rapid ascendance of behavioral economics (e.g., Sent 2004; Angner and Loewenstein forthcoming; and Camerer and Loewenstein 2004). Moreover, it was implicitly a recognition of the early support of behavioral economics through the Alfred P. Sloan and later Russell Sage Foundation’s 264 Floris Heukelom behavioral economics program, which ran from 1984 through 1992.

Great Marketing and Bad Experiments = The Behavioral Econ Scam

So, What Is Behavior Really About: First, No Free Will

*Economics-the humanities and the social sciences are bunk too, but that is another post(s).  The latest bench brain science has made their ideas obsolete.  Stay tuned.

..although people may be prone to mistakes in their decision making, they are ultimately capable of and willing to avoid mistakes when they are given the correct information and sufficient time. Moreover, …people want to comply with – what he understood as – the normative theories of expected utility theory, Bayesian statistics, and behavioral axioms of von Neumann and Morgenstern and Savage. Starting in the early 1970s some…students began to question this conviction.

Tversky in particular questioned whether people indeed by and large behave in accordance with the normative theories. Tversky’s celebrated work with fellow Israeli-psychologist Kahneman, which became known as the heuristics and biases program, assumed that people make their decisions on the basis of decision heuristics and not on the basis of Savage’s axioms and other normative theories. As a result, Kahneman and Tversky argued, these heuristics often produce systematic and predictable biases from the predictions of the normative theories.

An alternative behavioral theory appeared in 1979 as “Prospect Theory: An Analysis of Decision under Risk,” published in Econometrica, the article referred to by Thaler in the quotation above. In prospect theory, Kahneman and Tversky maintained utility maximizing and the other theories of rational decision making of the economists and mathematicians as the universal, normative benchmarks by which all decision making was to be judged. But in addition they argued that economists had focused too much on the normative theories, and that they should devote more energy to developing descriptive accounts of human decision behavior. In the second part of the article, Kahneman and Tversky provided their own detailed theory of how people actually make their decisions, the now famous prospect theory, which argued that:

– after a first heuristics-based editing phase
– the human being makes her decisions from the perspective of a context-determined reference point
-based on a preference for risk-avoiding in the gain-domain
– and a preference for risk-seeking in the loss-domain.
Both in the size of their funds and in their visibility, private foundations are a twentieth-century American phenomenon . In the interwar period, only four of these foundations provided substantial support to economists: the Carnegie philanthropies, the Rockefeller philanthropies, the Alfred P. Sloan Foundation, and the Russell Sage Foundation. After the Second World War, the Ford Foundation joined their ranks with a generous program supporting economists. The foundations were self-conscious in their support of economics, which had to serve the advancement of some larger social purpose like the alleviation of poverty, maintenance of full employment, or protection of the environment. In other words, economics had to be useful. For that reason a general strategy was to select one or a few scientists that best fitted the social purpose the foundation had in mind, and then to stay with this individual or individuals until the objectives had been achieved.

Throughout the twentieth century, the Sloan Foundation’s board of trustees was dominated by present and former presidents of General Motors; presidents of financial institutions such as Morgan Stanley, American Express, and Mutual Life Insurance; high-ranking government bureaucrats such as a Secretary of State and World Bank president; and professors and science administrators such as a president of the National Academy of Sciences and a director of the Institute of Advanced Studies.

The behavioral economics program was a Sloan program from 1984 to 1989. In sharp contrast to the Sloan Foundation, the board of trustees of the Russell Sage Foundation in the postwar period predominantly consisted of accomplished professors of the social and behavioral sciences, including sociologists, political scientists, economists, and historians. The behavioral economics program ran at the Russell Sage Foundation from 1986 to1992.

A major difference between the Sloan and Russell Sage Foundation was the amount of annual funds available for grants…that throughout the six years
of its existence, the behavioral economics program was a relatively small program at the Sloan Foundation. By contrast, the Russell Sage Foundation’s total annual endowments between 1986 and 1992 were much smaller than those of the Sloan Foundation, and the share spent on the behavioral economics program thus larger.

… word was spread in the academic community that the Sloan Foundation was considering setting up a new program on behavioral economics, and during the second half of 1983 the first unsolicited grant requests started coming in…the new program was concentrated more specifically on “the potential contribution of psychology and other behavioral sciences to the study of financial markets” …in particular because “financial markets are often considered the most efficient of markets and thus might be thought to be the most immune to non-rational factors” (ibid.). Anomalies of rational behavior would hence have their strongest impact on theories of financial markets, and alternative behavioral theories that incorporate the “non-rational” behavior would be most visible there.

…Thaler recalls: “I am not sure how that name [behavioral finance] emerged but by the time I wrote my first finance paper in 1985 with De Bondt [De Bondt and Thaler 1985], the term behavioral economics was being used for the kind of economics I and some others were doing so BF [behavioral finance] became the natural
term for the application of these ideas to financial economics” (email Thaler to author, 14 January 2009).

…In other words, the program’s organizers – Wanner, Kahneman, Thaler, and the advisory committee – actively tried to prevent a theoretical, economic discussion of neoclassical economic theory, and in advance tried to steer the discussions towards behavioral terms.

In addition, on behalf of the Sloan board of trustees Wanner asked the advisory committee members…to reflect on the possible future of the behavioral economics program. Wanner…The document noted that although the behavioral economics program up until then had “been an extremelyinteresting exercise, it has nevertheless left us with the conclusion that behavioral economics is largely a promise to be fulfilled” (Wanner’s letter to unspecified, no date [+/- November, 1985], RAC). Moreover, “[t]he promise upon which behavioral economics rests is that such anomalies [of rational economic behavior – FH] might be rendered explicable by means of new economic models that employ more realistic behavioral assumptions than those of standard theory. But delivery on this promise is still pending. In the meantime, simply accumulating more demonstrations of anomalies or of the unrealistic character of foundational assumptions seems unlikely to have a serious impact on mainstream economics” (ibid.).

…Wanner, Kahneman, Thaler, and the advisory committee, on the other hand, were more interested in how initial individual behavior deviates from the theoretically defined equilibrium, irrespective of whether it exists or not. In addition, Wanner, Kahneman, and Thaler questioned how often economic markets are allowed the time to mature towards equilibrium..

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3 thoughts on “Behavioral Economics is Bunk*: The “Why” and the How

  1. Pingback: There Is No Agency – Anywhere………Sorry | Brain Molecule Marketing

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