Bryan Caplan  

Revenge of the Game Theorist

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I'm a fan of behavioral economics, but I've got to admit that behavior economists can be painfully condescending. "You only disagree with it because you haven't bothered to read it," is the subtext, and sometimes it's out in the open. Thus, Matt Rabin writes:

Because behavioral research is so often assessed in light of such arguments, it is common when presenting psychological findings to discuss broad methodological objections and attempt to rebut them.

I refrain from doing so. It is my strong impression that many of the arguments invoked against the reality or relevance of behavioral research derive from unfamiliarity with the details of this research... And as the aggressive uncuriosity shown in the past toward behavioral research continues to diminish, we can look forward to focusing entirely on its substance. (JEL 36(1): 41)

Ariel Rubinstein, reprinted with permission.In my view, this smug attitude confirms that behavioral economists suffer from the same biases they study - most obviously, overconfidence. And someone is finally calling them on it. Legendary game theorist Ariel Rubinstein has gone on the attack against behavioral economists' rhetorical inflation, and while he's certainly aggressive, he's hardly uncurious. Here are some of Rubinstein's key accusations:

  • Behavioral economists have an empirical double standard: Strict scrutiny for standard theories, nepotism for behavioral theories.

    Rabin goes out of his way to beat, if I may use his own phrase, the “dead parrot” of full rationality. Of course there are many facts that are hard to reconcile with full rationality. But the psychology and economics literature has replaced a dead parrot with one that is equally dead. If the “time consistent” model is wrong, then the [alternate model Rabin favors] is equally wrong. It can easily be disproved experimentally (see Rubinstein (2003,2004)) but... fans apparently prefer to ignore experimental evidence that does not go their way.

  • Behavioral economists' experiments are sloppy, and win acceptance as long as they get the "right answer":

    It is my impression that intuitive and “sexy” results are gladly accepted by behavioral economists without sufficient criticism.

    Let me illustrate the point with the well known paper, Gneezy and Rustichini (2000). Colin describes the paper in the following words: “To discourage parents from picking their children up late, a day-care center instituted a fine for each minute that parents arrived late at the center. The fine had the perverse effect of increasing parental lateness..."

    Being a skeptic, I found it difficult to believe that the experiment could have been carried out as described. I know Israel quite well. It is a country where rules are rarely enforced... Therefore, I at least want to know what the procedure was for collecting data.

    His detective work revealed that:

    There was no attempt to control the accuracy of the RA’s records. Oddly, I was not allowed to talk with the teachers.

    [...]

    Who is to blame? The overly motivated authors; the refereeing process which puts too much trust in authors’ data; myself, since I knew about the faulty procedure and did not bother to write a comment (which would probably have been rejected); and what is most relevant to the current discussion – those behavioral economists who gave the paper wide exposure without critical assessment.

  • Neuroeconomics looks like a late 90's dot.com: big promises, big investment, but zero visible earnings.

    I would not be surprised if brain studies eventually change our view of decision making. However, I have yet to come across a single relevant insight produced by these studies. The popularity of brain studies might have to do with the obsession among many economists of becoming scientists.

    I don't agree with everything Rubinstein says, but his conclusion is dead-on: "For Behavioral Economics to be a revolutionary program of research rather than a passing episode, it must become more open-minded and much more critical of itself."

    The best way for behavioral economists to rebut Rubinstein's charges would be to respectfully engage him. If they can't bring themselves to do so, Rubinstein can rest his case.


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    TRACKBACKS (6 to date)
    TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/388
    The author at South(west)paw in a related article titled ariel rubinstein vs. matthew rabin: round 2 writes:
      Bryan Caplan at econlog writes about Ariel Rubinstein’s latest critique of Matt Rabin and behavioral economics. Rabin is a behavioral economist at UC-Berkeley who claims to have proven mathematically what Kahneman and Tversky proved empirically: expe... [Tracked on October 28, 2005 7:46 PM]
    The author at South(west)paw in a related article titled matt rabin's heretical theorem writes:
      In June, 2000, Matt Rabin, an economist at Berkeley, won the MacArthur genius award for his work on translating concepts from psychology, especially Daniel Kahneman and Amos Tversky, into mathematics and therefore, making psychology more palatable to e... [Tracked on November 1, 2005 10:17 AM]
    COMMENTS (8 to date)
    bernie writes:

    Bryan,

    The attitude that behavioral economists have is similar to the one of behavioral theorists. Smug. They tout phenomena which they do not really explain in a truly cognitive manner. The difference is that behavioral theorist actually developed the field and economist are now claiming what was found over 30 years ago largely by psychologists.

    I am sympathetic with those who challenge behavioralist on ecological validity. Many of the phenomena presented have no ecological validity. That is, where are people actually confronted with the choices that they use to demonstrate preference changes. One may even argue they have no external validity. In which, operating markets do we see the behaviors they build theories around. This opens the question whether internal validity and construct validity are addressed at all by behavioralists.

    This brings me to a more fundamental issue. Are behavioral economists even studying economics. Where are the markets? Without them we are speaking psychology. Why are economist not trained in psychology studying psychology?

    Steve Sailer writes:

    Surprise, surprise, this dubious Israeli daycare "experiment" plays a featured role in Steven D. Levitt's "Freakonomics."

    Barkley Rosser writes:

    Rubinstein has a history of engaging in histrionic critiques of this and that. Quite a bit of this is overdone, although there certainly has been some overdone self-satisfied huffing and puffing going on by some behavioral economists.

    Regarding Rabin, he has been criticized by some other behavioral/experimental economists, notably GMU's Vernon Smith, who argues that Rabin is way too conventional in trying to even bother with assuming the existence of utility functions with all these special characteristics.

    While there may be some loose ends in the Israeli kindergarten study, there are other studies that show the same phenomenon that are now in the process of being published. Rubinstein beat the parrot to smithereens on that one, and he frankly looks like the referee who did not get his way regarding the ultimate handling of a paper. That sort of thing looks even more petty than the whining of the author whose paper is rejected by a journal.

    As for bernie's remark, what would you consider to be a "truly cognitive manner"? That many behavioral econ papers are loose with their theory may be true. But then many of them consider that they have seriously undermined at least the standard theory, and that it also true.

    Mikael writes:

    Quoting S. Sailer: "Surprise, surprise, this dubious Israeli daycare "experiment" plays a featured role in Steven D. Levitt's "Freakonomics."".

    - Well, it is hard to evaluate Rubins claim about how the study was performed. However, the results should come as no surprise to anyone familiar with the literature on behavioral econ.

    Individuals are of course motivated not only by monetary incentives, but also by social incentives. There are by now plentiful of papers showing how monetary incentive can have the opposite result given the view of neoclassical theory. Montetary incentives can in many cases replace social incentives, and if the monetary is lower than the social cost...what's the surprise?

    Most individuals also care about status, self-image, relative position in society etcetera. This is evident to everyone with their eyes open and also thoroughly proven in the behavioral literature. This might upset hardcore neoclassicals, but hardly anyone else.

    Baxter writes:
    Surprise, surprise, this dubious Israeli daycare "experiment" plays a featured role in Steven D. Levitt's "Freakonomics."

    Surprise, surprise, that Steve Sailer has another claim on Freakonomics.

    Paul writes:

    Here’s a good quote from an interview with Robert Aumann;

    I have grave doubts about what’s called “behavioral
    economics,” but isn’t really behavioral. The term implies that that is how
    people actually behave, in contradistinction to what the theory says. But
    that’s not what behavioral economics is concerned with. On the contrary,
    most of behavioral economics deals with artificial laboratory setups, at
    best. At worst, it deals with polls, questionnaires.

    Or as Milton Friedman said (something like) its not that people are necessarily rational but they act as if they were.

    I think finance people and economists are intellectually frustrated at their inability to “improve upon” EMH and rational expectations. They try so hard to be physicists instead of political philosophers.

    Barkley Rosser writes:

    Yes, Aumann agrees with Rubinstein on this, or perhaps it is more accurate to say that Rubinstein agrees with Aumann, who has long been a defender of the orthodox rational agent model.

    It is not sufficient to simply state that because Milton Friedman said so, therefore people "behave as if they are rational." This is something that can be studied empirically, and not just in labs or surveys or whatever. Thus, back in 1979 Daniel Hausman documented that people in buying various appliances for which one could pay more for ones that saved energy later, people were exhibiting extremely high internal discount rates, early evidence for the hyperbolic discounting that Rubinstein does not like. Now one can stuff this kind of thing into the rational agent model if one does enough exaggerated contortions, but it gets to looking pretty ridiculous.

    BTW, just because lots of agents do not conform to rationality (and many financial markets violate the EMH, at least for extended periods of time), this does not mean that there are no rational agents or efficient markets (which do not necessarily coincide, anyway).

    mstanley writes:

    Bernie's initial point is a good one. A surprising amount of behavioral economics is economists rediscovering stuff that psychologists demonstrated decades ago. The Gneezy and Rustichinni paper is a good example -- psychologists have talked about how external motivations (like cash) displace internal (ethical, pleasure, etc.) motivations for quite some time. The unique contribution of economists ought to be showing how this happens in a market context, why it is not displaced by arbitrage, etc. There has definitely been some good work doing this, particularly in areas like pensions (401K behavior) and finance. But too much stuff is essentially experimental. Psychologists are better at experimental design than economists are.

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