Friday, November 4, 2011

Rational Economic Man?

As Copernicus removed the earth from the centre of the universe and Darwin knocked humans off their biological perch, Mr. Kahneman has shown that we are not the paragons of reason we assume ourselves to be.
The Economist.  “Human Decision-Making: No so smart now.”  October 28, 2011.  Page 98.  Review of Thinking, Fast and Slow by Daniel Kahneman.  

These types of quotes have to end. While it is true that Kahneman documented many interesting economic behaviors, it is false to say that he created a revolution in now economists view man. Just because we write a constrained-utility-optimization problem on the board does mean that we believe it to be exactly how the human brain operates. Go into any economics classroom and you will hear the teacher stress to students that all models are false but some are useful*. We teach the sunk-cost fallacy for the reason that we know humans commit the fallacy—why else would the fallacy be interesting? Every economist brushes with his own behavioral anomalies everyday, and is not so stupid to believe he is the only one who has trouble saving money, tends to prefer the status-quo, values something less when he must explain why, and the like. I know of no economist who believes or once believed in the rational man that researchers like Kahneman and Ariely debunked. The authors taught us some things, there is no doubt, but there was no revolution.

*George Box

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