Only You Can Decide: Behavioral Economics, Neuroscience, and Austrian Economics

|Peter Boettke|

One of my favorite things to do on Sunday mornings is to read the NYT and watch CBS Sunday morning.  This morning the show kicked off with a fascinating discussion with Jonah Lehrer and Harvard professor Jennifer Lerner on how we make decisions.  The age old debate is whether emotion or reason govern our decisions, and the relatively recent science of neuroscience is helping us resolve that philosophical debate.  Though, of course, different thinkers stress different conclusions of the research, and have different understandings of the idea of rational decision making as understood by decision scientists, economists, and philosophers of action.  As Jonah Lehrer explains in his book, How We Decide, the philosophical depiction of a battle between our minds and our gut is not supported by the work being discovered by neuroscientists.  Instead, what they have found is "our best decisions are a finely tuned blend of both feeling and reason and the precise mix depends on the situation."  Lehrer actually points to the work of Herbert Simon (Nobel Prize in Economics, 1978), who argued that the decision making was analogous to a scissors -- one blade of the scissors represents our brain, the other blade represents the environment within which the brain is operating.  If you want to understand decision making, you have to look at both blades simultaneously -- the balance between reason and emotion, and the context within which decisions are being made.

My criticism of some work in behavioral economics is that the results are interpreted without paying sufficient attention to the context of choice.  Instead, rationality is understood in an abstract form -- as if context didn't matter.  But choice is always within a context, and it is always filtered through individual human minds (with the corresponding preferences, ideologies, mental frames of reference, etc.).  Philosophically, I would say that John Searle's Rationality In Action (MIT, 2001) would be the reference I'd point, in Political Science, I'd point to Lin Ostrom's APSA Presidential Address "A Behavioral Approach to the Rational Choice Theory of Collective Action", and in economics it is a toss up between Vernon Smith's Nobel Lecture on ecological rationality (and now book, Rationality in Economics (Cambridge, 2007)), Mises's first hundred pages or so in Human Action, Shackle's Epistemics and Economics, and Buchanan's essay "Natural and Artifactual Man."  In short, we are rational choosers, but humanly rational choosers, not robots.  Context matters.  Subjective perceptions matter.

In 1898, Veblen chided the neoclassical model of man as a "lightening calculator of pleasures and pains who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift him about the area."  In that famous essay, he also singles out the Austrian school as striving to escape this model of man and offering instead a process oriented theory.  Though ultimately Veblen argues that Menger did not go far enough in his effort to escape the classical and neoclassical model of man.  In William Jaffe's 1976 study of the founders of the marginal revolution, he suggests that not only should Menger be recognized as possessing a different model of man but that his model of man was radically different than the lightening calculator of pleasures and pains.  Man for Menger, Jaffe wrote, is constantly caught between alluring hopes and haunting fears.

Choice in the Austrian tradition does exhibit characteristics of instrumental rationality, but in the framework of open ended choice.  We not only need to discover the best means to obtain our ends, but also what ends we may in fact want to pursue.  And we must discover this ourselves within the context of our lives.  We pursue our projects and we strive to pursue those projects as effectively as we can.* Sometimes our projects are stupid, and sometimes we err in our pursuits.  But they are our projects.  As Jim Buchanan puts it, "Man wants liberty to be the man he wants to become."

------------

*One of my favorite philosophical books is Loren Lomasky's Persons, Rights and Moral Community (Oxford, 1990) and his concept of personal projects.  I think Lomasky's brilliant book is underappreciated by economists who think about decision making.

Comments

[Greg Ransom]

Brain scans show that master chess players don't use "reason", they use their face recognition system to identify memorized pattern systems.

More evidence that folks like Hayek and Wittgenstein and Dennett are right about the significance of patterns ....

[Greg Ransom]

More support for believing that the near complete ignorance of the great tradition of economic thought by most economists is deeply damaging to scientific understanding in the profession

[Jerry O'Driscoll]

Rationality in Mises is the quite limited concept that man economizes in his application of means to ends. Mises is agnostic about the source of the ends. His phrasing that man seeks to remove a felt uneasiness accommodates both sources of ends.

The final quote from Buchanan is one of my favorite.

Hayek pushed a different, older concept of reason: the ability to apprehend reality. Hayek + Buchanan go well together.

[Rafe Champion]

Antonio Damasio is arguably the king of this particular hill. http://www.hedweb.com/bgcharlton/damasioreview.html

One of his early books described the case of a man who lost an "emotional" part of his brain when an accident drove an iron rod through it and the result was not more effective (rational) decision-making but seriously reduced capacity to focus, to rank priorities and actually make decisions.

On the topic of personal projects, that was one of the interests of Charlotte Buhler who worked with Karl Buhler in a psychology research institute supporting school reform in Vienna in the 1920s and 30s. Her field work involved the diaries and essays written by school children. They fled from Hitler and Charlotte became one of the prime movers in the Humanistic Psychology movement in the US.

[Funzeek]

"Conscious control" and "choice" is turning out to be mainly an illusion and cultural artifact. Although a darn good one, don't you think?

For example, all other animals seem to get along very well, thank you, without "consciousness." Likely "consciousness is mainly a social verbal exchange and self-talk, post hoc.

Economics is in a very tough position, independent of getting it dead wrong with the meltdown, etc. It really has no way to efficaciously integrate the new knowledge from neuroscience. That is the domain of the social sciences - sorry Nobel committee.

The inability to do any experimentation, prediction and testing is proving a fatal flaw. In truth, it is largely a humanistic area of study.

Even physics, yes the king of empiricism, is starting to understand that the way our minds, and other mammals, process the world is far more determinate than our models. Of course, the world and empirical reality exists independently of our perception, just likely not the way we perceive and express it. Especially with math.

[Troy Camplin]

The work in moral reasoning is also wuite telling. Most of the time, we have a gut reaction to some sort of action, then rationalize it after the fact. However, if we learn to reason about our morals, we can fine-tune those moral instincts into something increasingly closer to moral reasoning.

There is also evidence that if we go with our guts on making a major decision, we are happier about that decision than if we reason through all the options, weighing them, etc. We rationalize the choice after the fact. Still, social/cultural/economic conditions do pushis in particualr directions, making those decisions more or less rational (or, typically rational for the conditions).

Please note, though, that while it is true that we rationalize our actions after the fact, that reasoning -- and followup remembering, which involves editing of our actions -- fine-tunes those actions. Further, we are always acting on a social/cultural/economic milieu, which also affects what is rational (rational action in a tribe is not necessarily rational action in a technologically advanced free market economy).

Thanks, by the way, for that annoyingly awesome reading list. Just what I need: more things to read!

[Greg Ransom]

Humans have consciousness in a way monkeys don't -- there's all sorts of evidence for this. The question is why. See Ned Block's new book on the topic.

[Greg Ransom]

Sorry. Forget Block. See Nicholas Humphrey's book _Seeing Red_.

Off particular interest is Humphrey's discussion of blind sight. We can act in our interests without consciousness -- so why do we have it?

[Mario Rizzo]

Antonio Damasio is great.

[Roger Koppl]

Pete,

Do you think neuroscience and the rest might have the potential to suggest useful modifications to praxeology? I think praxeology is our interpretive language, so it's not subject to falsification. But if human cognition does not really work the way introspection says, then it would seem possible that new scientific knowledge about how cognition works could suggest amendments to praxeology that would make it more useful. I admit I don't have have any concrete examples, so I'm being entirely speculative.

[Greg Ransom]

Roger -- ever get a change to check out Wittgenstein? The many-many relations between "meanings" and uses of words interact and re-calibrate and extend in different directions over time. But the background understanding and practice of language use and ways of "going on together" is really foundational -- and cannot be replaced, as those seek to practice "explanation by elimination" so often image is possible. (Compare eliminating everyday talk of temperatures or colors in terms of physics equations or wavelengths of light, etc.)

I'd also suggest this.

"Introspection" is a really pathological picture / metaphor for what it at issue here -- Wittgenstein helps in figuring out why.

The more helpful move is the move found in both Hayek and Wittgenstein -- a move toward see that language is a shared understanding mapped out in patterns of "going on together" -- and the PUBLIC share domain used to share understanding of the "external" world gets a problematic double use when we exploit it to talk about the "internal" world of what is common to ourselves and (mostly) universally shared between ourselves (what we share "internally" -- talked about by both Mises and Hayek).

Hard stuff to talk about in a blog post, but the key thing is to think of mathematics and its relation to our brains and to physics and to our linguistic practices.

Is mathematics subject to modification due to discoveries about how our brain does math?

The basics of Menger's logic of valuation is a logic.

Rather than sticking to Mises' neo-Kantian conception, my suggestion is that we'll make better progress when we think about this as Wittgenstein thinks of language, logic and mathematics, and the relations of one person's mind and behavior and logic to another's intermediated by language and the world.

The 19th century metaphor's and conceptions are simply far too misleading and unhelpful in various ways.

Well, too much and not enough all at once!!

[Barkley Rosser]

Arguably self-consciousness in humans is different from other species, but both chimp species, dolphins, elephants, and possibly some other species appear to have self-consciousness to some degree. Of course econ experiments with monkeys have shown that they are more likely to be Nash-rational and "self-interestedly" cheat in PD games than humans.

[Greg Ransom]

Alex Rosenberg and other "eliminative materialists" advocate abandoning ALL introspective language and eliminating it completely in favor of brain talk.

Rosenberg takes seriously the idea that only scientific categories exist -- nothing else can exist but the "real" things science tells us really exist.

Introspective categories are pure and fantastical "folk" talk, exactly like the belief in ghosts.

[Greg Ransom]

Barkley, this is no longer an "argument". Studies demonstrate genuine differences between species.

Barkley writes:

"Arguably self-consciousness in humans is different from other species"

[Roger Koppl]

Greg,

I guess we're not on the same page. I don't think I understood your comment at all. You ask whether I ever got a chance to check out Wittgenstein. Um, yes. See, for example, a paper co-authored with Dick Langlois. “Organization and Language Games,” Journal of Management and Governance, 2001, 5(3-4): 287-305. An ungated version is here: http://sp.uconn.edu/~langlois/games.pdf.

I think your comment about "explanation by elimination" warns me off reductionism? But I never advocated that. On the contrary, I always make a big deal out of Hayek "diagonal" argument on methodological dualism.

You point out that math is not about psychology. But praxeology *does* refer to human psychology because it refers to "action" and not "behavior." You know what I mean: The knee's automatic kick in the doctor's office differs from the hand's waving motion because the first is meaningless "behavior" and the second is meaningful "action" (greeting a friend). Isn't meaning a psychic phenomenon? If our implicit model of psychic phenomena has been demonstrably wrong in some way, shouldn't we consider the possibility that an amended version of praxeology might be more useful for at least some of the scientific purposes of economists? That's all I was getting at.

[Greg Ransom]

Roger, on Wittgenstein, I've clearly mixed up conversation threads with someone else, sorry.

Anyway, let me suggest this.

A move toward Wittgenstein (and post 1956 Hayek) takes you away from the belief / desire model of mental causation (the "action") picture -- a picture which contains within it hall sorts of philosophical puzzles and confusions built within it. And it moves you to a picture of shared universal structures of mind and behavior -- more of a patterned picture of structures, not entities (e.g. the move from Russell's atomism to Wittgenstein patterns of behavior, and from Mach's atomism to Hayek's patterns of brain structure and motion patterns.)

My suggestion is that this Wittgenstein / Hayek (post 1956) take on the "psychological" leaves us within the net of language games -- with the "primacy of the abstract" contained in our primal common ways of going on together taking, ultimately, an irreplaceable place at the core, and adjusted merely at the edges by what we learn from the lab or from the models created by the scientific imagination.

[Greg Ransom]

Let me add this. We can imagine that elementary math and the logic of valuation lie rather close to the core of the common structure of mind shared by people.

And you may guess that I'm tying Wittgenstein to Quine's "net" picture of epistemology (like much else I see Quine as making Wittgensteinian insights safe for analytic philosophers.)

"My suggestion is that this Wittgenstein / Hayek (post 1956) take on the "psychological" leaves us within the net of language games -- with the "primacy of the abstract" contained in our primal common ways of going on together taking, ultimately, an irreplaceable place at the core, and adjusted merely at the edges by what we learn from the lab or from the models created by the scientific imagination."

[Greg Ransom]

Roger -- there are two rival ways to cash out "meaning" -- the atomistic/analytic philosophy way most philosophers of mind and language attempt in one way or another, and Wittgenstein's "going on together" patterned model.

These are very different things.

[Roger Koppl]

Ah! Now I'm getting closer, Greg. The view from The Sensory Order seems to fit with Wittgenstein and seems to represent a bit of a departure from earlier views. Seems right to me. It's a big deal that we seem to have a universal structure of mind. That's what lets us understand one another as both Hayek and Mises said.

I admit I don't understand about "nets" and "going on together," although the problem might be mostly the lingo.

Now if someone were to challenge me and ask, "Yeah but how would all that imply the slightest tweak to Misesian praxeology?" I don't think I could answer him or her. But somehow it seems as if it should. Any suggestions? An example would great if that's possible.

[Greg Ransom]

Roger remarks:

"Now if someone were to challenge me and ask, "Yeah but how would all that imply the slightest tweak to Misesian praxeology?" I don't think I could answer him or her. But somehow it seems as if it should. Any suggestions? An example would great if that's possible."

Mises admits that there is conceptual evolution, and that his casting of "praxeology" is stipulated within a conceptual frame that has grown and changed over time.

This raises a puzzle that Mises clearly admits but doesn't solve.

And there are bigger problems for those who are serious about removing identifiable pathologies and inconsistencies in our understanding of how our different kinds of knowledge fit together.

For example, we can point out that attempts to cash out the "meanings" and the "belief / desire" in a traditional stipulated logical or "scientific" model have descended into endless puzzles and conceptual failure.

The "tweak" here is that remove the Menger logic of valuation tradition out of what just about everyone considers to be a failed 19th century philosophical program -- and you place in a frame that seems actually to end the puzzles and problems, and it does so within a program that all sorts of contemporary people respect and are working on in various ways (note how Edelman or Kuhn or Hayek have developed aspects of this work, not to mention various philosophers of language, logic and mathematics).

And they might find this of significance.

Mises great insight is that the elements of the formal structure of the equilibrium construct (knowable to one constructing mind) get their intuitive meaning from the significance roughly comparable elements get from the actual social coordination system of the market -- Wittgenstein shows that the same is true with the formal construct of "meaning" relations that logicians and philosophers of language produce (knowable to one constructing mind). The elements of these formal constructs borrow their significance from the social coordination system of the public natural language network.

There is a symmetry of the model/social world relation uniting the social phenomena of language and the social phenomena of the market that any Misesian should find both pleasure and pride in.

[Current]

I find all this stuff Greg and Roger are discussing difficult to understand.

Many folks have written introductions to Austrian Economics, Economics in general and so on. But, I don't think there is any sort of introduction book to this. Where do you start "Alice in Wonderland"?

It would be a more widely understood topic if there were an approachable intro book.

[Troy Camplin]

It's all spontaneous order. The brain as spontaneous order (Hayek, The Sensory Order), language (Hayek,Wittgenstein) and language games (Wittgenstein) as spontaneous order, cultural traditions as spontaneous order (Hayek), economy/catallaxy as spontaneous order (Hayek), science as spontaneous order (Polanyi), culture as spontaneous order (Paul Cantor), and literature (Cantor, Camplin) and the arts (Camplin) as spontaneous order. Read about the nature of spontaneous orders, complex adaptive systems, and network theory -- those are the introductory texts. I would recommend coming over to http://www.studiesinemergentorder.com to see some of the work we are doing there on this topic.

[Greg Ransom]

Current -- this is hard stuff.

Some of Hayek's essays on rules and explanation and patterns in his _Studies_ and his _New Studies_ are a helpful entry point.

Unfortunately, there is no easy or very good introduction to the problems of the philosophy of mind, language, science, logic and math that both explains the historical development of the problem -- and Wittgenstein's way out.

[Greg Ransom]

A readable introduction to some of the puzzles created in the philosophy of language by the "entities" picture of meaning -- and Wittgenstein's social solution to the problem is Howard Wettstein's _The Magic Prism_.

Wettstein learned his Wittgenstein from participating in the same Wittgenstein reading group with Larry Wright which I attended. Until this book came out it was never clear Wettstein understood either Wright nor Wittgenstein, but reading Wettstein's book is like listening to Wright talk.

Also recommended, Erick Rech, "Frege's Influence on Wittgenstein: Reversing Metaphysics via the Context Principle", a paper which nicely shows the "flip" from an stipulated entities view to a network social background view.

http://www.faculty.ucr.edu/~reck/Reck-F.%27s%20Influence%20on%20W.pdf

[Roger Koppl]

Current,

Me too.

[Greg Ransom]

Current. Here's a simple intro.

Hayek explains how the logic of valuation is viewable to a single mind -- the model constructor knows all the "givens" in the model, all the "values" and "prices".

But the model is just a model -- the BIG mistake is to confuse the model for the world, and failing to see how the words and structures which make up the model get there meaning and significance from the real world of social phenomena which in VITAL ways is a very different thing than the model.

And this is really Mises point about the difference between real prices and real human valuations in the real world and "prices" and "values" in the logical constructs of price and value theory. Real prices and real acts of valuation take place in the real world in a social context -- an non-optional social context of private property, money, exchange, and unknowably changing conditions -- stuff which CAN'T be put in a logic knowable to a single mind.

Well, there is a parallel case in logic and language. The effort has been made by Frege and Russell and Plato and unending philosophers to cash out "meanings" and logical relations in terms of a model with entities knowable to a single minds -- a logical construction.

This has produced unending failure and paradox, failure and paradox which spread to the philosophy of mind and the philosophy of science and elsewhere.

Wittgenstein shows how language and meaning does not reside in any set of entities surveyable to one mind -- Wittgenstein uses EXACTLY the same language as Hayek talking about logical construct of value theory and its limitations. We can have a "God's eye view" (Hayek) or "Birds eye view" (Wittgenstein) of the logical construct -- but we CANNOT have a "bird's eye view" or "God's eye view" of the phenomena this construct is meant to model and explain, this stuff is instantiated in patterns of common behavior (rules of property, shared language use practices, patterns of exchange cooperation at as yet unknowable valuations and prices, etc.) This last part is best understood reading Hayek, Wittgenstein, Mises or Kirzner.

[Current]

Thanks,

Neither "Studies in PPE" or "New Studies in PPE" by Hayek are in print. Are they available in the collected works series under a different name?

[Greg Ransom]

Here's another interesting parallel.

Lange and Neurath others thought the the model the -- valuation construct -- could be made the social world -- you could eliminate money or private property or prices determined on the market.

Russell and Carnap and (early) Wittgenstein and others thought they could "limn" all meaning in a perfectly clear artificial language -- a logical construct with stipulated "meanings" indexically defined -- eliminating all the ambiguities of "natural" language, and perhaps fully replacing it (this is a crude account of their project, but this is a comment on a blog post.)

[Current]

Thanks for the intro Greg, that's very interesting. I see what you mean.

[Greg Ransom]

Historically, the move away from the model/idexically defined "entities" picture comes with Hayek and Wittgenstein's rejection of Mach's phenomenalism -- the phenomenalism that influenced Russell and Carnap and the early Wittgenstein.

And note well. One of the big developments in Austrian economics was the rejection of Schumpeter's Mach-inspired "operationalist" interpretation of marginalist economics by Mises and Hayek ....

Neurath, of course, was both a positivist working in the Carnap / Mach tradition and the advocate of the money-less "war economy" -- and as a social theorist Neurath seemed to have the historicist / Marxist view that the evolution of social entities could be viewed by a single mind as if from a God's eye view -- a sort of "indexical entities"
model of the evolution of the whole social system, the way in which (as Hayek almost suggests in his _The Counter-Revolution of Science) historicism and positivism have a unity of method.

I wrote:

"Lange and Neurath others thought the the model the -- valuation construct -- could be made the social world -- you could eliminate money or private property or prices determined on the market.

Russell and Carnap and (early) Wittgenstein and others thought they could "limn" all meaning in a perfectly clear artificial language -- a logical construct with stipulated "meanings" indexically defined -- eliminating all the ambiguities of "natural" language, and perhaps fully replacing it (this is a crude account of their project, but this is a comment on a blog post.)"

[Greg Ransom]

A great paradox is that Hume has a foot in both camps ..

Hume has both an associationist / indexical account of knowledge and meaning, etc. This stuff influenced Mill and Mach and Neurath and Carnap and through them the literatures on causation and explanation and the nature of "science".

And he has a habits / rules picture of social phenomena and institutions. This stuff influenced Hayek.

But note well.

How you understand economics depends on which Hume you adopt.

Alex Rosenberg is a hard core Humean of the first sort, and he attempts to understand economics in terms of the dominant "received" Millian account of science and explanation and the Humean account of the nature of causation. (Daniel Hausman also works in the Mill tradition).

Hayek is a Humean of the second sort, and his understanding of economics and science and explanation is completely different.

Hayek was attracted to Karl Popper in part because at its root Popper offers a foundational takedown of the associationist / Machian / positivist picture of knowledge and learning -- the picture Schumpeter and Samuelson and many other economics believed was the true "scientific" way to understand economics.

[Greg Ransom]

Hume takes us back to the problem of consciousness / science.

Most pictures of mind / consciousness attempt to cash out "action" in terms of a "mental entities" causal account, i.e. "beliefs & desires" cause actions -- but note well, this is an "indexical entities" / model construct picture, a picture which no one can explicate without problems and paradox.

And it is most especially problematic when attempt to tie it to the world of science and scientific entities, and to various models of language and meanings and concepts. A huge literature.

The Humean picture which cashes out causation and meaning in terms of a associationist / indexical entities model creates paradox either as a picture of science, or as a picture of mind and "action" or as a picture of language.

Most tradition accounts attempting to make sense of "consciousness" and the relation of consciousness to "science" work in some version of the Humean indexical entities / causation tradition.

And every version turns out to be in some way pathological, either as "content" views of the mind or as radical "eliminative materialist" views of mind.

[Current]

Though I don't understand all of it, I'm beginning to see what you mean. I think that this sort of thing is important.

For example, I was in a discussion on Crooked Timber a couple of days ago. I wrote: "when someone deals with a limited liability company they are aware that the limitation on liability is in place, it is something that they take into account."

A leftist replying to me said "I find the idea laughable that a consumer considers the legal structure of the entity when they are deciding whether to engage in a transaction. I just can’t fathom it on 99% of consumer transactions."

The problem here is confusion of types of knowledge. Every customer know that a business can "go out of business" as an entity and I think most know that they can do so without the owners necessarily going bankrupt. That was my point. It isn't necessary for an individual to understand the formal law behind limited liability companies for that individual to pick up that knowledge from experience.

While discussing things with leftists I've found that this is a very common theme. They often think that we require that common people have unreasonable formal knowledge. But, what we very often mean is that people already know how to act appropriately (even if they don't know exactly why).

[Roger Koppl]

Current,

I think we are sometimes too cavalier in our treatment of knowledge, however. I don't know if that comment applies to you, of course, but I do think it applies to a good bit of pro-market argument.

Think about doctors or hospitals. We don't know much about which are better and which are worse. How different if I buy a toaster! I buy it from Walmart or Macy's or some other large vendor. That gives me a quality assurance; it won't burst into flames. I buy a Hamilton Beach toaster, so there's more assurance of quality. I definitely think it won't burst into flames and cause my house to burn down. Plus I see on the box that it is UL approved and Consumer Reports gave it good rating. I know more about my toaster than the hospital where I get my surgery!

The epistemic infirmities of the healthcare market are rooted in the thicket of regulation in medicine, starting with licensing restrictions for doctors. Such restrictions, for example, make it hard for Walmart to run on-site clinics.

The "free market" can have a pretty lousy informational structure. When it does, however, we should ask whether the reason might not be some set of state controls. When a market critic challenges the knowledge requirements in a given market or in general, we should be open to the possibility that the critic is right. We should also be alert, however, to the possibility that such epistemic infirmities may be rooted in bad policy.

[Current]

I agree Roger, and I've argued that before (though probably elsewhere).

[topills.com review]

Government-back-stopped investment banks behaving like hedge funds on the taxpayer dime have given capitalism a pretty bad rep lately.