Is Behavioral Economics Doomed? The Ordinary versus the Extraordinary [Format Kindle]

David Levine is a fine, lucid, relaxed writer who conveys complex information in a straightforward manner without compromising the fundamental issues.

I quite agree with his argument that substantive rationality is shortchanged in many behavioral economics papers and books. I have argued this position at length in my book The Bounds of Reason (Princeton, 2009).

I have three problems with his argument.

First, who are these "behavioral economists" whom he critiques? He mentions the neuroeconomists (but only a couple). Is Vernon Smith on his Bad Guy list? Am I? Who exactly is? Is Ernst Fehr? Do NO "behavioral economists" escape his critique? If so, who escapes? Without such a list, Levine is making the mistake of appearing bigoted (everyone who belongs to a certain group has a particular quality) and of disliking the evidence. Theorists should NEVER critique experimentalists except for running bad experiments in a true science.

Second, Levine seriously underestimate the importance of social preferences. This is just a scientific error and it does not further his argument because he agrees that social preferences can be rational.

For instance, his analysis of voting is just silly. He shows in voting experiments in the laboratory that the participation rate can be explained by simple self-interest. However, people vote in elections because they have social preferences for democracy and collective political solidarity. Levikne overgeneralizes from his experiment that social preferences and morally-based incentives are not relevant to voting. In fact, voting in a democracy is a perfect example of the deep importance of our moral constitution. Why on earth would he want to deny this, or even diminish it as an important social fact? I cannot imagine.

Third, he confuses rationality with common knowledge of rationality in your discussion of backward induction. He should know better than this, and if you doesn't, he can read my paper on the topic on my web site (or Bounds of Reason).

1. Who is a behavioral economist? I am for one. It's true that I pick on "behavioral economists:" but I do so by picking leading self-proclaimed behavioral economists and analyzing what they have said behavioral economics is.

2. I don't think social preferences are unimportant - it's an area I've worked on and am currently working on. I don't spend much time on it in the book because I don't think it is very controversial among mainstream economists, and in fact the main point I point out in the book about social preferences is the long history in economics of analyzing them.

I think that the voting issue is a bit of an overreaction: I find it surprising that simple models of approximate rationality (the quantal response model) do reasonably well. If I were to pick points, I'd say that motives for voting vary a lot and that the role of peers may be more important than social preferences per se. So voter participation among retired people is very high, and for many it is a social event - a chance to meet friends at the polling place.

3. Mea Culpa. I tried to keep things light without making errors, but this is indeed an error.