Do I detect a change in the winds of mainstream economics?
A recent article in the Economist gives me hope. It suggests that ideas of non-rational, adaptive, and distributed decision-making – which have been topics of research in agent-based modeling, psychology, neuroscience, anthropology, and behavioral economics for some time – are now starting to seep into the consciousness of mainstream economics.
Describing Daniel McFadden’s recent work titled “The New Science of Pleasure“, the article details how concepts from psychology, such as prospect theory, are casting renewed doubt on the validity of mainstream economics’ hallmark theory of consumer choice. Indeed, mainstream economic theory has come under fire recently in the wake of economic recession stemming from “irrational” financial decisions, which many economists failed to predict or reconcile with their models and theories.
In all fairness, many mainstream economists would readily offer that their models are unrealistic in many ways, and are useful for understanding how economic systems tend towards rationale outcomes in the long-term. True enough. What this article argues, however, is that the assumptions that underlie mainstream economic models and theory can also lead to unrealistic worldviews and policy recommendations. For example, ‘more choice is good’, but sometimes this can lead to sub-optimal (i.e. not rational) choices because the consumer is overwhelmed with options. From the article, “Explicitly modelling the process of making a choice might prompt economists to take a more ambiguous view of an abundance of choices.”
And this line of reasoning leads to agent-based modeling as a potential tool to understand how choices are made: what psychological elements influence decisions, how those psychological influence vary with individual heterogeneity characteristics, and how decisions are enacted into behavior.
A parting shot from the article: “This is undoubtedly messier than standard economics. So is real life.”