I will agree there is much room for improvement in economic theory and rationality that a philosopher could make some contributions on. Rational expectations was very poorly thought out in economics or probably a joke invented to help rich people.
One direction I just started learning in the past 3 years is from biochemistry that is actually quite difficult material but you can experiment on yourself! Foods, drugs, vitamins, sunshine, electronics, sleep, herbs, food additives, furniture, air pollution,… all trigger chemical reactions that have an amazing effect on IQ, mood, health, attitudes, epigenetics, gene health, genetic expression, ….
I never thought my sports health binge diet fad hobbies had much to do brain function except I did notice many problems get solved subconsciously while running and walking. But I have decades of experience that I can sort of remember the correlations with brain function.
Also chemicals in the economy relates to human survival and ecology beyond economics.
I have not encountered much of this in economics or business literature but will be looking for it.
I will include some ideas in my popular book on philosopher kings as a replacement for bankers. That is not a joke. Trying to be the main tool in my social re-engineering.
right, there are at least two distinct issues:
c1. a good measure of what people value, what they strive for economically. i believe that this needs to be multi dimensional: there are different kinds of ‘happiness’. eg, one of the philosophy department faculty members writes on the role of ‘risk aversion’ as a separate parameter in "leading edge" decision theories. this would be in addition to the basic utility of having more goods.
c2. a realistic model of the nature of human rationality, as it is exhibited in the way people ordinary live their lives.
c3. certainly the phenomena that you class under ‘the sheeple’ need to be characterized by a separate set of parameters. there certainly is a kind of herding tendency, and also, there are subgroups that are to one degree or another ‘in competition’.
as i see it, there is a lot of room for new work in formulating more accurate economic theories.
How do you measure welfare, happiness, utility,….? Is the economy getting better or worse? How do you measure it? Can’t say much without a point of reference. A subjective, psychological topic.
Equilibrium = Extinction? If people don’t like what brings life, then their behavior may be their downfall. I see vast usage of drugs, junk food, diseases, fossil fuels, nuclear waste, chemicals, gmo, herbicides, pesticides, fungicides, insecticides, colorings, flavorings, … And lack of exercise, sunshine, and other healthful practices. Life imitating TV, radio, movies, and especially music videos.
Often Castastrophe is not recognized until it is too late. That is why they call investors "the herd" or sheeple.
Everybody getting into these topics nowadays but no important results yet except that people would be considered irrational compared to the theories of 30 years ago that stressed mathematical hyper-rationality and incredible cerebral computational capacity. I looked into this in 1979 but did not see where it would lead to anything. Maybe now more is known.
Feb. 6, 2014
Behavioral economics is focus of new MPS program
The role psychology and economics jointly play in decisions about food, public health, personal finance and sustainability will be examined in a newly accredited MPS (Master of Professional Studies) in Applied Behavioral Economics and Individual Choice, offered by the Charles H. Dyson School of Applied Economics and Management in Cornell’s College of Agriculture and Life Sciences.
Cornell’s newest MPS program is a chance to work with faculty members whose quirky experiments (like Brian Wansink’s “Bottomless Soup Bowl”) lead to fundamental improvements in school lunchrooms (David R. Just) across the country; who wonder why label-reading shoppers continue to buy junk food (Harry Kaiser); and whose analyses track property values near Superfund cleanup sites (William Schulze). Other key faculty include Vicki L. Bogan, associate professor of applied economics and management, and Jurate Liaukonyte, assistant professor of applied economics and management.
“Behavioral economics is a relatively new science with a distinguished history at Cornell,” said Just, associate professor and director of the Cornell Center for Behavioral Economics in Child Nutrition. He points to research pioneers like Richard Thaler (formerly in the Samuel Curtis Johnson Graduate School of Management), who is universally regarded as a founder of the discipline, and Thomas Gilovich, Cornell’s Irene Blecker Rosenfeld Professor of Psychology, who is a widely acknowledged expert in the psychology of everyday judgment and decision-making.
“Now we’re ready to build on this reputation by training a new generation of business and policy decision-makers,” said Just. Students in the two-semester master’s program can choose among three concentrations: behavioral marketing, sustainability and behavior, or behavioral finance.
Applicants to the MPS program are expected to come from undergraduate backgrounds ranging from nutrition, psychology and marketing to economics and business, Just said, “but we’re prepared to be surprised. We will consider anyone who is curious about why people make the decisions they do, and who wants to change the way the world thinks about food marketing, consumer research, consumer research and public policy.”
Behavioral economics and the related field, behavioral finance, study the effects of social, cognitive, and emotional factors on theeconomic decisions of individuals and institutions and the consequences for market prices, returns, and the resource allocation. The fields are primarily concerned with the bounds of rationality of economic agents. Behavioral models typically integrate insights frompsychology with microeconomic theory; in so doing, these behavioral models cover a range of concepts, methods, and fields.
The study of behavioral economics includes how market decisions are made and the mechanisms that drive public choice.
There are three prevalent themes in behavioral finances:
· Heuristics: People often make decisions based on approximate rules of thumb and not strict logic.
· Framing: The collection of anecdotes and stereotypes that make up the mental emotional filters individuals rely on to understand and respond to events.
· Market inefficiencies: These include mis-pricings and non-rational decision making.
The central issue in behavioral finance is explaining why market participants make systematic errors contrary to assumption of rational market participants. Such errors affect prices and returns, creating market inefficiencies. It also investigates how other participants take advantage (arbitrage) of such market inefficiencies.
Behavioral finance highlights inefficiencies such as under- or over-reactions to information as causes of market trends (and in extreme cases of bubbles and crashes). Such reactions have been attributed to limited investor attention, overconfidence, overoptimism, mimicry (herding instinct) and noise trading. Technical analysts consider behavioral finance, behavioral economics’ academic cousin, to be the theoretical basis for technical analysis.
Other key observations include the asymmetry between decisions to acquire or keep resources, known as the "bird in the bush" paradox, and loss aversion, the unwillingness to let go of a valued possession. Loss aversion appears to manifest itself in investor behavior as a reluctance to sell shares or other equity, if doing so would result in a nominal loss. It may also help explain why housing prices rarely/slowly decline to market clearing levels during periods of low demand.
Benartzi and Thaler (1995), applying a version of prospect theory, claim to have solved the equity premium puzzle, something conventional finance models have been unable to do so far.Experimental finance applies the experimental method, e.g., creating an artificial market by some kind of simulation software to study people’s decision-making process and behavior in financial markets.
Quantitative behavioral finance
Quantitative behavioral finance uses mathematical and statistical methodology to understand behavioral biases. In marketing research, a study shows little evidence that escalating biases impact marketing decisions. Leading contributors include Gunduz Caginalp(Editor of the Journal of Behavioral Finance from 2001–2004) and collaborators including 2002 Nobelist Vernon Smith, David Porter, Don Balenovich, Vladimira Ilieva and Ahmet Duran, and Ray Sturm.
Some financial models used in money management and asset valuation incorporate behavioral finance parameters, for example:
· Thaler’s model of price reactions to information, with three phases, underreaction-adjustment-overreaction, creating a price trend
One characteristic of overreaction is that average returns following announcements of good news is lower than following bad news. In other words, overreaction occurs if the market reacts too strongly or for too long to news, thus requiring adjustment in the opposite direction. As a result, outperforming assets in one period are likely to underperform in the following period. This also applies to customers’ irrational purchasing habits.
· The stock image coefficient
Critics such as Eugene Fama typically support the efficient-market hypothesis. They contend that behavioral finance is more a collection of anomalies than a true branch of finance and that these anomalies are either quickly priced out of the market or explained by appealing to market microstructure arguments. However, individual cognitive biases are distinct from social biases; the former can be averaged out by the market, while the other can create positive feedback loops that drive the market further and further from a "fair price" equilibrium. Similarly, for an anomaly to violate market efficiency, an investor must be able to trade against it and earn abnormal profits; this is not the case for many anomalies.
A specific example of this criticism appears in some explanations of the equity premium puzzle. It is argued that the cause is entry barriers (both practical and psychological) and that returns between stocks and bonds should equalize as electronic resources open up the stock market to more traders. In reply, others contend that most personal investment funds are managed through superannuation funds, minimizing the effect of these putative entry barriers. In addition, professional investors and fund managers seem to hold more bonds than one would expect given return differentials.
Behavioral game theory
Behavioral game theory analyzes interactive strategic decisions and behavior using the methods of game theory,experimental economics, and experimental psychology. Experiments include testing deviations from typical simplifications of economic theory such as the independence axiom and neglect of altruism,fairness, and framing effects. On the positive side, the method has been applied to interactive learning and social preferences. As a research program, the subject is a development of the last three decades.
Economic reasoning in non-human animals
A handful of comparative psychologists have attempted to demonstrate economic reasoning in non-human animals. Early attempts along these lines focus on the behavior of rats and pigeons. These studies draw on the tenets of behavioral psychology, where the main goal is to discover analogs to human behavior in experimentally-tractable non-human animals. They are also methodologically similar to the work of Ferster and Skinner. Methodological similarities aside, early researchers in non-human economics deviate from behaviorism in their terminology. Although such studies are set up primarily in an operant conditioning chamber, using food rewards for pecking/bar-pressing behavior, the researchers describe pecking and bar pressing not in terms of reinforcement and stimulus–response relationships, but instead in terms of work, demand, budget, and labor. Recent studies have adopted a slightly different approach, taking a more evolutionary perspective, comparing economic behavior of humans to a species of non-human primate, the capuchin monkey.
The animal as a human analog