Abstract
This paper examines issues of ontology and methodology in behavioral economics: the attempt to increase the explanatory and predictive power of economic theory by providing it with more psychologically plausible foundations. Of special interest is the epistemological status of neoclassical economic theory within behavioral economics, the runaway success story of contemporary economics. Behavioral economists aspire to replace the fundamental assumptions of orthodox, neoclassical economic theory. Yet, behavioral economists have gone out of their way to praise those very assumptions. Matthew Rabin, for example, writes that behavioral economics “is not only built on the premise that [orthodox] economic methods are great, but also that most mainstream economic assumptions are great.” These apparently contradictory attitudes toward neoclassical theory raises the question of what, exactly, its epistemological status within behavioral economics is. This paper argues that the paradox can be resolved, and the question answered, by thinking of the epistemological status of neoclassical theory within behavioral economics in terms of Max Weber’s ideal types: analytical constructs that are not intended to be descriptively true of anything but which nevertheless can be used for a variety of theoretical purposes. The analysis is consistent with many of the insights from the philosophical literature on models in science and has important implications for the practice of economics—behavioral and neoclassical—as well as for the very nature of rationality.
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Notes
There are exceptions, of course, some of whom are cited below.
In spite of the break with orthodoxy, behavioral economics is still economics, as it remains, as Frank and Ben S. Bernanke express the canonical view, “the study of how people make choices under conditions of scarcity and of the results of those choices for society” (Frank and Bernanke 2004, p. 4).
Because the term “realism” is needlessly philosophically loaded, Mäki (1998) has proposed using the term “(psychological) realisticness” to refer to what I have called “(psychological) plausibility.” Since “realism” is the term favored by behavioral economists, however, it will appear frequently below.
Contemporary discussions tend to rely on examples such as that of a frictionless plane (e.g., Clarke 2001, p. 7143).
I thank an anonymous referee for helping me extend the metaphor.
Indeed, it has been argued that Weber’s main source of inspiration was the great Austrian economist Carl Menger (1840–1921). In the words of Fritz K. Ringer: “We know that [the concept of the ‘ideal type’] was at last partly inspired by Carl Menger, and that Weber persistently cited neoclassical economic theory to illustrate the uses of ‘ideal-typical’ construction” (Ringer 1997, p. 110).
Behavioral economists’ belief that people at least some of the time manage to act in accordance with the theory is reflected in their models; as we will see below, neoclassical theory is often preserved as a special case of behavioral theories.
Notice how Thaler writes that alternative models are only sometimes required, allowing for the fact that people’s behavior is frequently captured by orthodox theory.
This is not to say that behavioral economists accept the additional set of assumptions incorporated into the discounted-utility model as a normative standard for intertemporal choice, however; the situation in the case of dynamic choice is considerably more complicated.
For the special case of economics, see the thorough review by Morgan and Knuuttila (2012).
Identifying the conditions under which false models lead to truer theories, better explanations, and so on is an important philosophical project, which is unfortunately outside the scope of this paper.
Eric Schliesser notes that the affinity might not be coincidental, since Friedman’s teacher Frank Knight “was not merely the first American translator of Weber, but remained keenly and, perhaps, increasingly interested in Weber throughout his life” (Schliesser 2011, p. 534).
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Acknowledgments
I am grateful to Colin Bird, Jeroen Van Bouwel, Floris Heukelom, George Loewenstein, and two anonymous referees for constructive comments on earlier drafts. Errors remain my own.
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Angner, E. “To navigate safely in the vast sea of empirical facts”. Synthese 192, 3557–3575 (2015). https://doi.org/10.1007/s11229-014-0552-9
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DOI: https://doi.org/10.1007/s11229-014-0552-9