Monday, January 31, 2011

Behaviorial economics is futile so far

Neoclassical economics has taken a lot of flak recently, I think unjustly, for failing to predict the last economic crisis. For many critics, behavioral economics is the next big idea, because it is much more closely tied to empirics and has a special focus on irrational behavior. But beware of fads, of which there are unfortunately too many in Economics.

Nathan Berg and Gerg Gigerenzer say that behavioral economics is just as bad as neoclassical economics because they are both full of ad hoc assumption and build on axioms that are not tested. In particular, the deviations from rationality are never evaluated in how costly they are, for example whether people are then poorer or less happy. This is important as if those deviations are costly, people would likely do something about them and they may become less important. In other words, behavioral economics if far from being mature enough to be the panacea some are seeing in it.

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