Wednesday, February 16, 2005

Limits to Rationality

Inasmuch I hate Limits to Growth, this one I love: Limits to Rationality. Sharla Stewart writes very eloquently on Richard Thaler, an avant garde behavioral economist at Chicago. Stewart quotes Thaler:
“most economists recognize that some of the people are not fully rational some of the time, and some of the time that matters.”
“The combination of free entry, unfettered competition, and free choice seems hard to quarrel with, [h]owever, if participants are not well-informed or highly motivated, then maximizing choice may not lead to the best possible outcome.”

On traditionalists view that rationals cancel out irrationals,
Behavioralists disagree, arguing that bounded rationality does indeed bump the market’s invisible hand.
Of course, Gary Becker slightly resists:
“While I believe there’s value in some areas of psychology, the focus is different...” “We’re interested in how groups respond.”
"Division of labor strongly attenuates if not eliminates any effects caused by bounded rationality".
To which Thaler comments:
“Maybe Gary Becker sometimes confuses behavioral economics with psychology,” says Thaler. “Because behavioral economists think about markets all the time.”
And yes, don't forget Thaler-Sunstein good paper, Libertarian Paternalism.

No comments: