Berg,N.
Gigerenzer,G.

Behavioral economics confronts a problem when it argues for its scientific relevance based on claims of superior empirical realism while defending models that are almost surely wrong as descriptions of true psychological processes (e.g., prospect theory, hyperbolic discounting, and social preference utility functions). Behavioral economists frequently observe that constrained optimization of neoclassical objective functions rests on unrealistic assumptions, and proceed by adding new terms and parameters to that objective function and constraint set that require even more heroic assumptions about decision processes as arising from solving an even more complex constrained optimization problem. Empirical tests of these more highly parameterized models typically rest on comparisons of fit (something equivalent to R-squared) rather than genuine out-of-sample prediction. Very little empirical investigation seeking to uncover actual decision processes can be found in this allegedly empirically-motivated behavioral literature. For a research program that counts improved empirical realism among its primary goals, it is startling that behavioral economics appears, in many cases, indistinguishable from neoclassical economics in its reliance on as-if arguments to justify ―psychological‖ models that make no pretense of even attempting to describe the psychological processes that underlie human decision making. Another equally startling similarity is the single normative model that both behavioral and neoclassical economists hold out as the unchallenged ideal for correctly making decisions. There are differences: neoclassical economists typically assume that firms and consumers conform to axioms such as transitivity, time consistency, Bayesian beliefs, and the Savage axioms needed to guarantee that expected utility representations of risk preferences exist, whereas behavioral economists commonly measure and model deviations from those axioms. Nevertheless, both programs refer to the same norms, without subjecting to empirical investigation the question of whether people who deviate from standard rationality are subject to economically significant losses. In spite of its prolific documentation of deviations from neoclassical norms, behavioral economics has produced almost no evidence that these deviations are correlated with lower earnings, lower happiness, impaired health, inaccurate beliefs, or shorter lives. We argue for an alternative methodological approach focused on veridical descriptions of decision process and a non-axiomatic normative framework: ecological rationality, which analyzes the match between decision processes and the environments in which they are used. To make behavioral economics, or psychology and economics, a more rigorously empirical science will require less effort spent extending as-if utility theory to account for biases and deviations, and substantially more careful observation of successful decision makers in their respective domains.

Berg, N., & Gigerenzer, G. (2010). As-if behavioral economics: Neoclassical economics in disguise? History of Economic Ideas, 18, 133-165. doi:10.1400/140334 (Full text)

Publication year	2010
Document type:	Article
Publication status:	Published
External URL:	http://library.mpib-berlin.mpg.de/ft/nb/NB_As-if_2010.pdf View
Categories:	Ecological RationalityForecastingConsumer BehaviorHealthExpected UtilityEnvironment Structure
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