A Behavioral Approach to Development Economics

|Peter Boettke|

 

What actually is the behavioral approach? I have suggested that behavioral can be understood as an opening up of the strict rational choice model.

But in this lecture, the term is discussed in the context of the evolution from policy evaluation to program design. Though note that the reason why we engage in designs is because the existing programs when evaluated turn out to fall short. And why are the existing programs failing? Because of incentive issues. And how do we study incentives? Rational choice analysis. So then we move on to design programs that are supposed to structure incentives. But when we construct designs, people don't actually behave the way we designers thought they would. And we get this disjoint between design and behavior time after time. So what do we do? We design the system better to take into account underlying behaviors and structure the system to "nudge" folks to do what it is we designers want them to do.

This is a very clear cut lecture and reflects a thoughtful and interesting mind. I enjoyed this discussion, but I believe all of those who think about behavioralism should read Vernon Smith's Nobel Prize lecture on the difference between ecological and constructivist rationality (and Gerd Gigerenzer's Rationality for Mortals) and then read backwards to an older essay by James Buchanan, "Natural and Artifactual Man." Both essays in their own way, push the argument that choice is individual and contextual and not abstract. Our decisions are based on our subjective assessment of the trade-offs we face in pursuing our subjective desires. And yes, we have problems of self-control and self-delusions, but we also respond to incentives even in these areas. And, moreover, there are no doubt issues associated with stated intentions and actions pursued, and there are issues of a disjoint between stated intentions and outcomes realized.

Good economics has to look at not only immediate actions, but also the indirect results of actions pursued. The lecture has a great slide which contrasts Spock with Homer Simpson, and then flashes a picture of Brad Pitt when he was wearing a rather unattractive beard. This was to reflect that human choosers are neither perfectly rational nor completely foolish, but instead capable but fallible human choosers. I think this is right. But it is also the model of man one reads in Adam Smith and David Hume, and also one reads in Ludwig von Mises and F. A. Hayek.  In fact, I think one would benefit greatly from reading the first 100 pages of Human Action, not with a focus on the defense of deductive logic and its role in praxeology, but instead with a focus on the nature of choice and what is required for a human chooser to the center of analysis.  Along these lines, I think the best recent work is Richard Wagner's Mind, Society and Human Action.

Mario Rizzo is currently working on the question of rationality as well as a critique of variants of the behavioral economics that underlies much of the discussion which in this lecture is viewed as "design principles".

Comments

[Dave]

Do you really think man isn't perfectly rational when he acts? Reading Human Action (top of page 14 of the Scholar's Edition, second paragraph of chapter 1 section 2), I have to wonder if it's even possible for man to act irrationally.* Here, Mises says that as long as man truly believes that the results of his purposeful action are the most efficient way that he knows of to bring about the desired state of affairs and he pursues that plan, then he is definitionally acting rationally. It doesn't matter if his actions really will bring about the desired state of the world (I'm thinking of tribesmen doing rain dances here); just that he believe that they will. The error that you speak of, therefore, is the discovery that the means employed actually do not bring about the ends desired.

Regardless, I read the essay you linked to as expounding this very classical point: beliefs matter. Error in judgement (or in determining causality) is possible as is error in execution (clearly it's not irrational, as Wagner says, to miss in billiards or as Alchian talks about with golf), but error in the formation of plans, at least in my reading of the essay and this section of Human Action, is not.

*Can man act irrationally, though, is an interesting question. I'm inclined to say no because he would have to choose to act in a way that is not consistent with what he wants. But aren't we then guilty of inferring ends?

[Peter Boettke]

Dave,

Purposiveness in Mises is different than optimization in standard theory. The behaviorialist in this discusion are contrasting their position with optimization, not purposiveness. Second, rationality in the modern context also relates not only to optimization but to correct action. Again this is not what Mises is discussing. So when you define rationality as stated formally, then saying individuals don't act rationality is not to say they don't act purposively.

Capable but fallible, and prone to prudence as well as self-delusion, are not inconsistent with a Misesian understanding of rationality.

[Roger Koppl]

Mullainathan needs one more big green arrow representing the need to model the modeler. Design is not as easy as he may seem to suggest.

[Jonathan]

Thanks for a stimulating post.

I would hazard that Daniel Kahneman also belongs in the group of thinkers who find humans to be capable though fallible. Vernon Smith has some interesting insights on this in his book: Rationality in Economics on page 150 and 151.

[Jim Rose]

The behavioural economics is an example of JS Mill’s truth that engaging with people who are partly or totally wrong sharpens your arguments and improves their presentation.

People have a better understanding of rationality such as through the work of Vernon smith on ecological and constructivist rationality and of how people deal with human frailties and correct error through specialisation, exchange and learning.

George Stigler’s in his Existence of x-inefficiency paper opposed attributing behaviour to errors because error can explain everything so it explains nothing until we have a theory of error.

Kirzner wrote a response saying that error is pervasive in economic processes. The rational Misesian human actors are human enough to err. The marksman who shoots wants, as a rule, to hit the mark. If he misses it, he is not irrational.

What is inefficient about the world, said Kirzner, is at each instant, enormous scope for improvements exist in one way or another and is yet simply not yet noticed. The lure of pure entrepreneurial profits harnesses the systematic elimination of error and points the way to the institutions necessary for the steady social improvements.

Behavioural economics is a clumsy way of discussing the pervasiveness of errors because insufficient attention is paid to decentralised, emergent market processes that correct them, often long ago.

Armen Alchian defined efficiency as "Whatever is, is efficient." If it wasn't efficient it would have been something different. Of course, if you try to change anything that is there, that is efficient too.

Armen Alchian would ask "If something is so optimal, why don't we see it then?" He pointed to the question of optimal taxes.

The notion was essentially that there must be other costs that you left out of your model; either costs involved in the political system, in organizing support, or in changes for this other solution which might seem to be such a lower cost option.

The basic point was why are we weighing only some costs and not others?

Why are the costs involved in minimizing that particular dead-weight losses that would be involved in setting a particular tax less important than other types of costs involved in informing people of what the options are or of organizing them to go and try to adopt the alternative options?

Error correction is not manna from heaven.

[McKinney]

Seems to me that behavioral economics is rediscovering fire.

Everything presented in the video, and much of what I have read in behavioral econ has already been done, and done better, in public relations and marketing research.

It's great that intelligent people have abandoned the insanity of the all-knowing "rational" actor of mainstream econ. But if you want to get a step ahead of behavioral econ, just spend an afternoon in the library looking over PR and marketing research. Those fields always had a Misesian approach to human nature.

[Dan]

Sorry to thread hijack, but there is a question on EJMR about what is the canonical austrian business cycle model.

If someone could point to a source that would be very helpful, thanks.

link: http://www.econjobrumors.com/topic/which-version-is-the-canonical-version-of-the-austrian-business-cycle-theory

[FC]

Suppose that I go to Chicago, walk into Cass Sunstein's office and nudge him vigorously on the nose. (The prosecutor would say "punch".) Further suppose that I appeal my conviction on substantive due process grounds and eventually find myself before Judge Posner. What, if anything, could be said in the terms of so-called behavioral economics about the probable, optimal or socially desirable outcome of the case?

[Roger Koppl]

I think the canonical version is Hayek 1935, Prices and Production. That doesn't mean an "Austrian" must view it as the last word or holy writ or something as some posters on econjobrumors seem to suggest.

[Jerry O'Driscoll]

To Roger's post, I'd add Hayek, Monetary Theory and the Trade Cycle as a complement. I do think I updated this in Economics as a Coordination Problem.

[McKinney]

"Prices and Production" is important, but I think "Profits, Interest and Investment" is a much clearer restatement of the same principles and he doesn't start from equilibrium. By 1939 Hayek was a much better writer, understood the opposition better, and could explain the principles in "Prices and Production" more clearly. Also, he develops the Ricardo Effect more fully in PII.

[Marcos]

Abrahamic religions are the miehtonostic faiths emphasizing and tracing their common origin to Abraham[1] or recognizing a spiritual tradition identified with him.[2][3][4] They are one of the three major divisions in comparative religion, along with Indian religions (Dharmic) and East Asian religions (Taoic). As of the early twenty-first century[update], it was estimated that 54% of the world's population (3.8 billion people) considered themselves adherents of the Abrahamic religions, about 30% of other religions, and 16% of no religion.[5][6]The three major Abrahamic religions are, in chronological order of founding, Judaism, Christianity, and Islam. Judaism regards itself as the religion of the descendants of Jacob,[n 1] a grandson of Abraham. It has a strictly unitary view of God, and the central holy book for almost all branches is the Hebrew Bible, as elucidated in the oral law.Christianity began as a sect of Judaism[n 2] in the Mediterranean Basin[n 3] of the 1st century CE and evolved into a separate religion—the Christian Church—with distinctive beliefs and practices. Jesus is the central figure of Christianity, considered by almost all denominations to be divine, typically as one person of a Triune God.[n 4] The Christian Bible is usually held to be the ultimate authority, alongside Sacred Tradition in some denominations (such as Roman Catholicism and Eastern Orthodoxy).Islam arose in Arabia[n 5] in the 7th century CE with a strictly unitary view of God.[n 6] Muslims (adherents of Islam) typically hold the Qur'an to be the ultimate authority, as revealed and elucidated through the teachings and practices[n 7] of a central, but not divine, prophet, Muhammad. Less well-known Abrahamic religions, originally offshoots of Shi'a Islam, include the Bahe1'ed Faith[n 8] and Druze.[7]The three main Abrahamic religions have certain similarities. All are miehtonostic, and conceive God to be a transcendent Creator-figure and the source of moral law,[8] and their sacred narratives feature many of the same figures, histories and places in each, although they often present them with different roles, perspectives and meanings. They also have many internal differences based on details of doctrine and practice. Christianity divided into three main branches (Catholic, Orthodox and Protestant), dozens of significant denominations, and even more smaller ones. Islam has two main branches (Sunni and Shi'a), each having a number of denominations. Judaism also has a small number of branches, of which the most significant are Orthodox, Conservative and Reform. At times the different religions—and often branches within the same religions—have had bitter conflicts with each other.You've been wiki-ized, Wanna. Ha, ha!

[Cheap Air Jordan]

Hello joyyqxrmq, Yes, sales is fundamentally a tale about love, aside from that it which not even attempt to just a adore historic past – sales is even a bit more like Romeo amid Juliet, a adore tragedy -Cheap Air Jordan Bunny screw a daily single point up Cheap Air Jordan.
Good rhbusyyy!!