Sunday, February 25, 2007

Twighlight for Rationality?

Neoclassical economics operates on the axiom that people make rational choices (as does the Mise-ian paradigm). In the neoclassical case, rational behaviour is essential for the mathematics to produce determinate solutions. In both cases, rational behaviour has an ‘If only…’ quality. It produced some stunning analyses in the 20th century, giving its exponents grounds for the croc of gold sought by all disciplines, that of being ‘hard’, rather than ‘soft’, science.

The tension between mainstream neoclassical economics (a sub-branch of maths) and the Mise-ian minority, as firmly convinced of their scientific rectitude as the most rabid of mainstream-ers, papers over what they share: belief in rationality as the operating principle of human action.

This belief is different from Adam Smith’s, who saw human action as a vastly more complex phenomenon than people acting uni-rationally. Moral behaviour, in Smith’s world, as a moral philosopher, was driven by mixed motives within ranges of human behaviour that allowed for people acting without intentional objectives related to the outcome for society, often from degrees of fear (risk aversion) through degrees of naivety (ignorance), which nevertheless could produce unintentional outcomes of benign and malign content (the two-sided nature of this process is often forgotten by exponents of the so-called ‘invisible’, as I have mentioned several times on Lost Legacy). The ruler whose greed led him to avarice that undermined his power; the merchant whose fear led him and others like him to grow richer at the expense of society’s possibilities; the inventor whose laziness led her to higher productivity at the cost of past investments in processes she helped overthrow; and so on, are examples of the far richer behaviour range available for economists to study.

Others are noticing that something is missing in conventional economics as taught with great seriousness in the world’s universities. From a not unexpected source – from among the people whose business is to make money out of the money business - Gregory M. Drahuschak (first vice president of Janney Montgomery Scott Inc., Pittsburgh) writes “Behavioral economics may be worth looking into” in Pittsburgh Tribune-Review, (25 February):


Although Scottish philosopher and political economist Adam Smith probably is best known for his book, "The Wealth of Nations," Smith might be remembered better for introducing the concept of behavioral economics in his 1759 book, "The Theory of Moral Sentiments." Two hundred forty-eight years later and after numerous harshly taught market lessons, Smith's work largely is ignored by a disturbingly large segment of the investing public.

Smith and others after him proposed the notion that a large portion of business and personal economic judgments are made based on the mental state of the people making the decisions. The notion largely was discredited by the middle of the last century, but recently it has resurfaced as a valid economic discipline. For some investors, however, the main lessons to be learned from the study of behavioral economics are mostly ignored.

A wide range of investors' behavior can be explained by subsets of behavioral economics. For example, why when faced with incontrovertible evidence, why do investors hang onto an investment that clearly should be liquidated? Behavioral psychologists would argue that one of the reasons is the fear of facing up to a bad decision.”

In an overly simplistic sense, the concepts of greed and fear as primary motivators are relevant. More often than not, however, it is greed, not fear, that generates the greatest problems.”

[To appreciate the scope of Gregory M. Drahuschak’s thinking read the rest of his article at:
http://www.pittsburghlive.com/x/pittsburghtrib/business/columnists/drahuschak/s_494763.html]

1 Comments:

Blogger Don said...

Gavin,

Neoclassical economics operates on the axiom that people make rational choices (as does the Mise-ian paradigm). In the neoclassical case, rational behaviour is essential for the mathematics to produce determinate solutions. In both cases, rational behaviour has an ‘If only…’ quality. It produced some stunning analyses in the 20th century, giving its exponents grounds for the croc of gold sought by all disciplines, that of being ‘hard’, rather than ‘soft’, science.

The tension between mainstream neoclassical economics (a sub-branch of maths) and the Mise-ian minority, as firmly convinced of their scientific rectitude as the most rabid of mainstream-ers, papers over what they share: belief in rationality as the operating principle of human action.

I think that you're wrong when you tie Mises and and a belief in rationality.

For Mises, human action is purposeful. The actor is assumed to be attempting to exchange his existing comprehensive subjective state of being for another one that is expected to be preferred by the actor.

But there is no judgement made as to whether the preference ranking of the before and after states makes any sense to anyone else or whether the action undertaken is in fact a means that can actually bring about the preferred state expected.

Regards, Don

2:06 pm  

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