David R. Henderson  

Thaler Rediscovers Hayek?

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As often happens when I read or hear something new, my impressions a day or more later, once I've pondered more, are different from my first impressions.

There's another thing about Thaler's view of standard neoclassical economics that bothers me. Here are Thaler and Rosalsky:

THALER: Well the theory is really quite simple, at least in principle. If you are considering some risky option, look at the probabilities, compute the utilities, and calculate and pick the best thing.
ROSALSKY: So Professor Thaler, relationships are big investments. And, umm...
ROSALSKY: Yeah. And I've been dating this girl for a few weeks now, and I'm thinking about using expected utility theory in order to decide whether or not to ask her to be my girlfriend. How would an econ go about making this decision?
THALER: Well, now the first thing you would have to do is-econs always think about opportunity costs. So you have to compare this girlfriend to all the possible other girl friends. Now, you do have training in economics, right?
ROSALSKY: Yeah, I do.
THALER: So that may be a limited set because-right? Because this has to be a girlfriend that presumably wants to reciprocate this relationship. So there's a set of possible girlfriends, not all of whom you know. Economists have written down models about how you should search in a situation like this. So, you know, you've had other girlfriends in the past, and either you or they have rejected you. So the question of whether this is the right one depends on how likely it is you'd find somebody better. That's the first thing an economist would do.
ROSALSKY: Right. And there's also other probabilities, right? I mean, you know, some day I want to get married, someday I want to have kids. And, you know, so that sort of- that upfront investment in her being my girlfriend, I have to have some sort of knowledge of the probabilities that, you know, I'm making the right investment here.
THALER: Right, and presumably if you decide that this is your girlfriend and behave responsibly then you're going to be missing out on all kinds of opportunities for searching for better alternatives. And that will be another opportunity cost.
ROSALSKY: Right, single life.
THALER: That homo economicus will be considering every day. Each day will be another decision about whether to stick with this girlfriend or resume searching. I recommend strongly not playing this particular part of the interview to this prospective girlfriend.

If you just read these words rather than listening to that part of the conversation, which starts at about 20:30, you might miss Thaler's sarcasm. He basically is saying that it's absurd to think in that calculating way about romantic relationships.

Two comments:

1. Many of us do think that way and it works. You fall in love with someone. You start discussing your future. You find out that you're a Bryan Caplan who wants 10 kids and she's a career woman who wants $10 million. What do you do? You drop her, or she drops you. In other words, you've tried to get relevant information about this potential romantic partner and that information has led you to conclude that this relationship won't work.

We can multiply the examples. You, desperate to find someone to marry because you're now in your late 20s or early 30s and you haven't found anyone yet, go to a bar. You hate bars. You find an attractive woman. (I'm telling all these stories from the male heterosexual angle for obvious reasons: I'm a male heterosexual. That's right. I just came out.) You have a great conversation. You set up a date. But it turns out that she wants to meet in a bar. She loves bars. This is relevant information. Your estimate of the probability that this will work just fell.

2. Where does Thaler score a point on neoclassical economics? Maybe, and only maybe, with the last part of the conversation above. He says, "Each day will be another decision about whether to stick with this girlfriend or resume searching." That doesn't tend to be how we act. Why? There are two reasons. First, building a relationship requires regular investments--of time and of emotional and financial capital. Many of us males have learned the hard way that when we try to "keep our options open because this one might not work out," the woman senses that and tells us either to take a hike or to commit. Take an example outside of romantic relationships: think of the job market. If you take a job and every day you are looking for another job because it might be better, you won't, all else equal, do a good job in your current employment situation.

The second reason it doesn't tend to be how we act is that we have limited information. There's so much you would want to know about your potential partner when your goal is to spend the next 40 or 50 years together. But information is costly and many neoclassical models ignored that. So when you find someone who looks promising, you invest in learning more about her. If it keeps looking promising, you stop the search.

And who was it, more than any other single economist, who emphasized the problems with models of perfect information? Sure, Joe Stiglitz did. But there was someone earlier. He wrote the following:

Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active coöperation. We need to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and of special circumstances. To know of and put to use a machine not fully employed, or somebody's skill which could be better utilized, or to be aware of a surplus stock which can be drawn upon during an interruption of supplies, is socially quite as useful as the knowledge of better alternative techniques. And the shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices, are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others.

Of course, I refer to Hayek. Unfortunately, when I look at the index of Richard Thaler's latest book, Misbehaving, I don't find any reference to Hayek.

COMMENTS (9 to date)
Jose Romeu Robazzi writes:

I have seen many other situations where a person uses a Hayekian, Misesian, or Austrian idea, but fails to recognize the influence. I wonder why...

trent steele writes:

"I have seen many other situations where a person uses a Hayekian, Misesian, or Austrian idea, but fails to recognize the influence. I wonder why..."

To admit its general applicability (i.e. regarding the "local knowledge" point) would be to admit that most economic policy is bunk. So they just occasionally deploy it when it's obvious and not dangerous to a policy position.

Doug Anderson writes:

There is a better term than either "homo economicus" or "econ" for the type of person Thaler discusses in this interview: Straw Man.

Adam Gurri writes:

A McCloskeyan response https://sweettalkconversation.wordpress.com/2015/06/06/david-henderson-doubles-down-on-a-caculated-love/

Cyril Morong writes:

This is from today's "Hagar the Horrible" comic strip:


Hernia (the girl): I have a question for you Hamlet (the boy)?

Hamlet: What is it, Hernia?

Hernia: Are we definitely, positively getting married? Or am I just wasting my time?

liberty writes:

Sure, we all consider these things when determining whether someone might be a good match, but I think the obvious point here was that it is quite cold and robotic to rely entirely on this kind of calculated interview when getting to know a potential romantic partner.

Instead, we get to know "the whole person" in a more holistic and sociable way, and people, and our culture, prefers that we rely upon indicators like "chemistry" or sexual attraction, ease of conversation - even when just small talk - and smell (we tend to enjoy the smell of someone we have good chemistry with, pheromones, as they convey important information-- I think it's foolish that people use perfume/cologne...). If instead someone uses a checklist and carefully calculates how much time to allocate to interviewing the individual, that person will feel it is impersonal, and rightly so, and be offended; and indeed the impersonal aspect will reduce its usefulness.

In fact the assumptions that go into creating any kind of checklist are often wrong and never the most important things that ultimately will matter.* The bottom line: true love has very little to do with anything you can write up in a list ahead of time, and when you find the right person they often look bad on paper, would score low in an interview based on rationally determined interview questions, but you don't care because they are right and you know it on levels both more animalistic or base and more transcendent; you just know it, it's tacit knowledge, something that you can't write up--which is why you can't get someone else to interview potential partners for you and even the best computer dating service can only run a first pass for you, and the best matchmaker is only slightly better, having human knowledge but not the knowledge that only the two involved can know.

* Even something as important as "do they want kids in the next 5 years" -- because if the two people fall in love, one might change their mind -- falling in love very often changes people's minds about stuff that they never would have imagined changing their minds about -- or it may become less important, until 5 years later one person changes their mind, etc.

blink writes:

Good points, David. Hayek is certainly relevant and missed by Thaler. For me, the main reason Thaler's caricature rings hollow is that his Econ blithely ignores other people. Instead of best responding to their actions, Thaler's Econ naively assumes everyone else is also an Econ. This is *terrible* optimization!

Tracy W writes:

Adam Gurri, on the McCloskeyian approach, I read that article and found myself thinking "Well, what if he's an alcoholic?"

It also reminds me of the time that my husband asked "What do you mean when you say that I love you?" and I promptly replied "It means that your utility appears in my utility function." After a moment's more thought I added "and is strictly increasing in the first derivative" but by then he was laughing so hard I don't think he heard me.

Adam writes:

@Tracy: I'm confused. Is calculating, economistic thinking the only answer to the existence of alcoholics and abusive people?

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