Abstract
Abstract Behavioral economics aspires to replace the agents of neoclassical economics with living, breathing human beings. Here, the author argues that behavioral economics, like its neoclassical counterpart, often neglects the role of active sense-making that motivates and guides much human behavior. The author reviews what is known about the cognitive science of sense-making, describing three kinds of cognitive tools—hypothesis-inference heuristics, stories, and intuitive theories—that people use to structure and understand information. He illustrates how these ideas from cognitive science can illuminate puzzles in economics, such as decision under Knightian uncertainty, the dynamics of economic (in)stability, and the voters’ preferences over economic policies. He concludes that cognitive science more broadly can enhance the explanatory and predictive quality of behavioral economic theories.
Highlights
The complaint has been well-rehearsed: The agents of neoclassical economics are unbounded—rational, patient, and selfish—whereas the earth is populated with humans who are, to varying degrees, biased, impatient, and generous (e.g., Kahneman, 2002; Mullainathan & Thaler, 2002; Simon, 1955; Thaler, 2015)
Behavioral economics came into the world and enriched our conception of what economic agents arecapable of, seeking to populate models with homo sapiens rather than homo economicus
That achievement does not go far enough. This is because the economic agents of both neoclassical and behavioral economics lack one very human feature—they don’t think
Summary
The complaint has been well-rehearsed: The agents of neoclassical economics are unbounded—rational, patient, and selfish—whereas the earth is populated with humans who are, to varying degrees, biased, impatient, and generous (e.g., Kahneman, 2002; Mullainathan & Thaler, 2002; Simon, 1955; Thaler, 2015). Both neoclassical and behavioral models treat humans as black boxes, much like early behaviorist models in psychology (e.g., Skinner, 1953; Watson, 1913), with the behavioral models perhaps better matches to individual behavior, but frequently failing to model what is going on in the agent’s mind. Treating humans as static processors of information—whether optimal or not— leads to explanations of behavior that are incomplete or incorrect and models that often fail to make sound predictions These shortcomings are common to neoclassical and to behavioral economics. Economics needs to take account of cognitive science—the study of how the mind processes information—in order to adequately understand how economic agents actively seek to understand and act on their world
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