Sunday, December 04, 2011

Of The Invisible Gorilla and the Invisible Hand

Diane Coyle, managing director of Enlightenment Economics, writes 3 December on VOX HERE and signposted with thanks to Mark Thoma HERE

“The invisible hand meets the invisible gorilla: The economics and psychology of scarce attention

in J.K. O'Regan, Why Red Doesn't Sound Like a Bell, Oxford University Press (2011) and courtesy of NASA:

Inattentional blindness’ is commonplace. The best-known example concerns what people about half the time fail to see when set the task of watching a video and counting passes between two teams of basketball players – a gorilla walking across the screen (Chabris and Simons 2010). The neuroscientists taking part in the workshop were not convinced the analogy between inattentional blindness and failure to predict was valid, but the economists thought the invisible gorilla could offer them a more fruitful set of assumptions than the invisible hand when it comes to how people form their preferences and make their decisions.

“… Since the financial crisis, many commentators have asked why so many economists failed to predict it – or even whether economics played a part in causing the crisis. A group of UK experts in 2009 attributed this failure to predict to a “psychology of denial” that had gripped the financial world as a whole.

The economics profession has since continued to evaluate its own role in the financial catastrophe and subsequent economic crisis. The subject’s standard assumptions about how people take decisions and choose to behave have been a particular focus for scrutiny. Did the assumption of rational, self-interested choice, given the available information, in itself contribute to a dreadful misunderstanding on the part of regulators and policymakers about what could happen in the financial markets?

Behavioural economics offers several examples of alternative rules of thumb about behaviour that describe typical decisions more accurately than the standard assumptions. But to address the question systematically, economists will need to learn from psychology (specifically, the psychology of individual choice in situations where people are faced with a constant flow of information, as they are with many economic decisions). …

The key theme was whether cognitive scientists’ growing understanding of how, given people’s limited attention, ‘sense perceptions’ translate into behaviour offers any lessons for economists.”

An interesting piece on threats to the self-anointed ‘science’ of neoclassical economics (which amuses natural scientists) from other disciplines that are experimenting on decision-making by people questioning the asserted theories of rational decision-making under assumptions of the mathematically proven ‘truths’ of marginal utility (post-1870s), the welfare theorems (Pareto), and post-Samuelson economics.

Much of the emptiness of modern economics was conveniently covered up adapting Samuelson’s invented version of Adam Smith (selfishness leading to public good) and his wholly innocent use of the, for him, popular metaphor of ‘an invisible hand’ which was fatally associated with the ‘miracle of markets’ without ever – and I mean ever – explaining exactly how it worked, where it came from ('hand of god'?), and why it was a missing term in the equations of marginal utility and general equilibrium, though lauded to the rafters for the effects of its spurious existence.

Metaphors, figures of speech, are never real, unlike the objects to which they refer, but nobody believes that they are real, except those who ‘believe’ metaphors exist because senior economists (including a few Nobel prize-winners) told them so.

No wonder some unidentified “economists thought the invisible gorilla could offer them a more fruitful set of assumptions than the invisible hand.”

To which I add an heartfelt: ‘hear, hear’.

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