Psychologists vs. economists

This is fun because, as an outsider to both fields, I can just stand back and watch. Dan Goldstein writes:

Someone agreed to give a talk to the University Economics Society here next week with the title: “Why Psychologists know more about Economic Behaviour than Economists”. Any suggestions JDMers might have would be interesting.

The query led to “a flurry of responses,” including:

You could exploit an inadvertent ambiguity in your talk title, and claim that you meant that psychologists know more about economic behaviour than they do about economists. Indeed, economists are mysterious beings. Many persevere in the belief that people must behave optimally, at least on average, and they seem perpetually baffled by basic psychological phenomena that seem completely intuitive to one’s proverbial grandparent. I feel that psychologists indeed understand them quite poorly.

Perhaps the core argument is that we [Psychologists] go out and look at the animals (at least now and then) while the economists very rarely do.

The answer seems to be quite simple. Economists are bound to the ‘rational model’ whereas psychologists are not.

What economists think about psychologists:
1. Psychologists only study rats, pigeons, college freshman, and crazy people.
2. (Perhaps due to the above,) psychologists are not very rational.
What psychologists think about economists:
1. Economists stubbornly hold to a rational model of man(kind) that (they must know) is obviously wrong.
2. Economists can never agree about what will happen to our economy.

I’ll now give a few comments of my own. First, my impression is that, within academia, economics has a higher status than psychology. Thus you see psychologists sniping at economists but not much of the reverse: economists probably don’t spend much time thinking about psychologists. It reminds me of when I used to teach at Berkeley: we could always get a rise out of the students by mentioning Stanford. But, at Stanford, if you mention Berkeley, nobody cares.

On the substance of the matter, of course psychologists will be able to explain some aspects of economic behavior better than economists can, and economists will be able to explain other aspects of economic behavior. I’d trust the economist more on the price of food and I’d trust the psychologist more on the question of what food a person will actually buy. I don’t know that either side would know “more” than the other.

10 thoughts on “Psychologists vs. economists

  1. Decision phenomena that psychologist's point at to suggest that humans are not rational are real and material. There are two serious problems that must be addressed before economists and for that matter psychologists should consider revamping economic theory to account for it.

    Psychologists need to offer a robust theory to explain the phenomena. Behavioral Decision Theory to date has compiled a vast number of experiments that indicate that humans do not decide according to the axioms of choice. What they have not done is to offer a theory that explains the phenomena. Theories to date seem to be as varied as the phenomena itself. In addition, many of the explanations have questionable internal validity and very questionable external validity. One could even say that the models require as much modification to predict correctly as the theories they seek to challenge.

    The second issue is that economic theory is about exchanges and markets not simply about individual decision rules. The assumption of rationality is made to characterize the agents in order to describe and predict exchange and market level effects. This is a very important theoretical issue often ignored or glossed over by psychologists. Economists make assumptions at one level to model exchange/market level behaviors. BDT has done very poorly at explaining and predicting market level behavior. It can be used to describe outcomes but does not offer a explanatory or predictive power. K&T's work in the area of Prospect Theory while material has not offered exchange level understanding. Financial BDT is a great example of this problem. The work is largely descriptive. No models have arisen to replace more standard financial models. The money still flows to the old standards.

    Another way to look at this problem is from the perspective of the sociologists. They would argue that many psychologist seek to reduce social systems to psychological principles. This to date has failed despite a tremendous effort.

  2. Andrew- one more thought in regards to your last point … I would trust a Marketer more on the price of bread than an Economist … and a Marketer on what food a consumer will actually buy than a Psychologist ;)

  3. Bee,

    Different people have different concerns. Like many economists and political scientists, I think a lot about rationality–that's why, for example, I wrote a paper about why voting is rational. But when I talked with some of my psychologist friends about this, they both thought the topic was sort of silly. They recognize that rationality is more of a state to aspire to than a human's usual way of being. They're hardly surprised that people often behave irrationally, and they were not particularly interested in my reconstruction of a particular behavior (voting) according to rational principles. I replied that, although rationality is certainly not _required_ as an explanation for an act such as voting, it could be useful to see that it _can_ be explained rationally, since that might give some insight into why the behavior persists.

    Nathan,

    Hey, what can I say. I'm an MIT alum, and we had a similar relation to Harvard. Mention Harvard (or "that school up the river") in an MIT class and you get a big reaction. Mention MIT to a Harvard class and they're like, Huh?

  4. Some interesting comments. In the interest of full disclosure, I have a PhD in social psychology, and do R&D in a marketing research company.

    Bee wrote that "Psychologists need to offer a robust theory to explain the phenomena. Behavioral Decision Theory to date has compiled a vast number of experiments …[but] they have not … offer[ed] a theory that explains the phenomena." I could have written that sentence as a grad student in 1973, and there's a good chance I did. This is discouraging. Have we learned nothing?

    In terms of pricing, marketers are definitely smarter than government economists. I remember going over some data with one of the BLS PhD's responsible for the CPI. Their group was baffled by the data that show that when coffee prices go up, the sales at the high end of the market don't suffer — and, in fact, the high end of the market is likely to increase in volume sales.

    To the economists, this violated some basic thing or other. Some law of supply and demand, or some such nonsense.

    To marketers, it makes perfect sense. Rising prices can drive out the middle — some people go as cheap as possible; others figure that as long as they are paying a lot, they should pay just a little bit more and get really good stuff.

  5. ZBicyclist,

    Sounds like you guys were not dealing with a very well trained economist ( or one who was educated a long time ago) because those are the types of examples put forward in any top 30 department's IO class. Basic economics (undergrad models) does not allow for taste variation that would result in that otensibly perverse outcome but any Ph.D. shoud have picked that up in a second. In fact, at my institution, marketing guys learn from demand forecasting from economists.

  6. The trouble with such cross-overs is that most of the time the "invader" has not bothered to read the literature and instead relies on undergraduate-level material. So it's no surprise in this case economists would ignore such a presentation. That said, there are occasionally surprises, such as the Kahneman-Tversky contributions, which were not to point out the existence of irrationality–duh!– but rather the combo of systematic, predictable irrationality plus model tractability.

  7. Hi all!

    I am this year following a course in Topics in Psychology, Sociology and Economics given by Jean Tirole. Based on his presentations my perception on the obvious friction b/w economists and psychologists is that it does not exist.

    Psychologists pointed out many phenomena that did not fit well at all with an economist's mind 30 years ago. Today, even if economists can not explain them, they do not question them. Instead they try to model them, and see its effects on (let's say) mainstream economics. Of course, in this modelling they still build on rational decision theory, mainly Bayesian equilibria.

    I can imagine, that many of you is shocked by this last statement, and would like to shout on me, that we economists still can not accept irrationality, that's why we move to Bayesian games. If you did it, please tell me what do you think: are humans affected by evolution? There are some studies from ethnography which definitely reinforce the idea, that rational outcomes might be the result of evolution. And in this case what economists state is simply, that evolution is present even for humans, not only for animals.

  8. Large swaths of economics are not positive, but normative. How should a rational person behave? Does it matter whether or not others are also behaving rationally? Will a rational person better achieve his goals than an irrational one? These questions are largely independent of whether or not people behave rationally (or hyper-rationally, or whatever). I don't know whether there's a "normative psychology" or not. To the psychologist's puzzle as to why economists seem to irrationally stick with rationality, I generally answer that until you underwstand the implications of rational behavior, you'll never understand irrational behavior, because you'll never know how much it costs you (or benefits you, pace Herbert Simon) to behave irrationally.

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