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Opinion from a Libertarian ViewPoint

Stop Trying to Turn Economics into a Branch of Psychology | Mises Wire

Posted by M. C. on January 22, 2022

By casting doubt on the notion that reason is the main faculty that navigates human actions behavioral economics emphasizes the importance of emotions as the key driving factor of human actions.

By means of psychological analysis, the practitioners of behavioral economics have supposedly demonstrated that people’s conduct is irrational.

Consequently, the practitioners of behavioral economics may have unintentionally laid the foundation for the introduction of government controls to “protect” individuals from their own irrational behavior.

https://mises.org/wire/stop-trying-turn-economics-branch-psychology

Frank Shostak

Recently, a relatively new economics called behavioral economics (BE) has started to gain popularity. Its practitioners, such as Daniel Kahneman, Vernon Smith, and Richard Thaler, were awarded Nobel Prizes for their contribution in the field of BE.

The BE framework emerged because of dissatisfaction with the neoclassical theory regarding consumer choices. In the neoclassical theory, individuals are presented as if a scale of preferences is hard-wired in their heads. Regardless of anything else, this scale remains the same all the time.

The practitioners of BE hold that this is unrealistic. To make the mainstream framework more realistic they are of the view that there is the need to introduce psychology into economics.

It is held that individual’s emotional state is a major factor in their decision process. If consumers are becoming more optimistic regarding the future then this is going to be an important message to businesses regarding investment decisions.

According to BE researchers whether consumers are generally patient or impatient determines whether or not they are inclined to spend or save today. If they are more patient and save more, then this can generate funds for entrepreneurs’ new investment projects.

Behavioral economists emphasize the importance of personality. An emphatic person is regarded more likely to make altruistic choices. Impulsive people are more likely to be impatient and not so good at saving up for their retirement. Venturesome people are more likely to take risks—they will be more likely to gamble.1

Whilst the BE criticism of mainstream economics is valid, the question arises whether BE solves the issue of unchanged consumer preferences and presents consumers as real people and not as human machines.

We suggest that the key here is the definition of what human beings are all about. According to the BE, people are not rational in a sense that they are using reason in various decisions. According to BE practitioners, the key driver of consumer choices are emotions. On this, the Nobel Laureate Vernon Smith holds, “People like to believe that good decision making is a consequence of the use of reason, and that any influence that the emotions might have is antithetical to good decisions. What is not appreciated by Mises and others who similarly rely on the primacy of reason in the theory of choice is the constructive role that the emotions play in human action.”

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