The Dismal Mind - Economics as a Pretension to Science - Part
III
4. Homo Economicus
The economic actor is assumed to be constantly engaged in the
rational pursuit of self interest. This is not a realistic model
- merely a (useful) approximation. People don't repeat their
mistakes systematically (=rationality in economics) and they
seek to optimize their preferences (altruism can be such a
preference, as well).
Still, many people are non-rational or only nearly rational in
certain situations. And the definition of "self-interest" as the
pursuit of the fulfilment of preferences is a tautology.
V. Consumer Choices
How are consumer choices influenced by advertising and by
pricing? No one seems to have a clear answer. Advertising is
both the dissemination of information and a signal sent to
consumers that a certain product is useful and qualitative
(otherwise, why would a manufacturer invest in advertising it)?
But experiments show that consumer choices are influenced by
more than these elements (for instance, by actual visual
exposure to advertising).
VI. Experimental Economics
People do not behave in accordance with the predictions of basic
economic theories (such as the standard theory of utility and
the theory of general equilibrium). They change their
preferences mysteriously and irrationally ("preference
reversals"). Moreover, their preferences (as evidenced by their
choices and decisions in experimental settings) are incompatible
with each other. Either economics is not testable (no experiment
to rigorously and validly test it can be designed) - or
something is very flawed with the intellectual pillars and
models of economics.
VII. Time Inconsistencies
People tend to lose control of their actions or procrastinate
because they place greater importance (greater "weight") on the
present and the near future than on the far future. This makes
them both irrational and unpredictable.
VIII. Positivism versus Pragmatism
Should economics be about the construction and testing of of
models, which are consistent with basic assumptions? Or should
it revolve around the mining of data for emerging patterns
(=rules, "laws")? On the one hand, patterns based on a limited
set of data are, by definition, inconclusive and temporary and,
therefore, cannot serve as a basis for any "science". On the
other hand, models based on assumptions are also temporary
because they can (and are bound to) be replaced by new models
with new (better?) assumptions.
One way around this apparent quagmire is to put human cognition
(=psychology) at the heart of economics. Assuming that the human
is immutable and knowable - it should be amenable to scientific
treatment. "Prospect theory", "bounded rationality theories" and
the study of "hindsight bias" and other cognitive deficiencies
are the fruits of this approach.
IX. Econometrics
Humans and their world are a multi-dimensional, hyper-complex
universe. Mathematics (statistics, computational mathematics,
information theory, etc.) is ill equipped to deal with such
problems. Econometric models are either weak and lack predictive
powers or fall into the traps of logical fallacies (such as the
"omitted variable bias" or "reverse causality").