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Last Friday I attended a fascinating seminar on neuroeconomics at the Wellcome Trust Centre for Neuroimaging. Over the next few days I’ll be blogging about questions and issues that arose from these events.

Last Friday I attended a fascinating seminar on neuroeconomics at the Wellcome Trust Centre for Neuroimaging. Over the next few days I’ll be blogging about questions and issues that arose from these events.

 

I’d just like to say something quickly about Tim Harford’s contribution. Tim’s personable and open demeanour belie a keen, subtle and formidable economic brain. His contributions to the day were many. But in general, he had three worries:

 

1)     that behavioural economics (BE) and neuroeconomics (NE) have a few interesting things to say about economic behaviour and how markets function, but there is no need to rethink the rational choice theories of neo-classical economics;

2)     that proponents of BE and NE (usually popularisers rather than actual scientists) tend to extrapolate grand conclusions about paradigm changes in how we think about economic decision-making, and decision-making more widely, from a few meagre (often experimental) results;

3)     that policies based on BE and NE still need to do the hard economic number-crunching work of thinking about long-term effects of policy, and politicians wowed by the ‘cool factor’ of BE and NE have forgotten to do this.

 

I think Tim is absolutely right to urge caution. He is an analytical thorn in the side of those who hail a new era of post-individualistic thinking about economics. In his exchange with Pete Lunn in Prospect he both brought doubt on the validity of the claims of BE and argued that good old-fashioned rational-choice theory can explain anything BE can. So given the cognitive virtue of conservatism about theories (if it ain’t broke don’t fix it), why all this talk of a paradigm shift?

 

I think there is great value in Tim’s questioning of the eager neophytes. But I think there is an ideological bias in his position. For example, on Friday he argued that one could make the case for saying that markets had not failed at all in the credit crunch. Rather, they had told us in no uncertain terms that complex derivatives were stupid things to invest too heavily in (which is the conclusion George Soros apparently drew).

 

But surely, Tim’s ideological commitment to the individualism of neo-classical economics is on display here? Crashes, crunches and depressions have happened before many times – investors creating bubbles is no new thing. The point is that we seem incapable of learning some kinds of lessons. So perhaps we should think about policies that reflect our shortcomings rather than vainly hoping we will rid ourselves of them? And BE and NE can do two things in this regard:

 

1)     give us a precise idea of where our cognitive shortcomings lie;

2)     help us to design systems and institutions etc in light of this knowledge.

 

But seeing things this way is a kind of paradigm-shift is it not? It’s accepting that we model economic behaviour, at least in part, in terms of the cognitive idiosyncracies of human beings, rather than in terms of an idealised rational agent.

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