Andrew Samwick at Vox Baby reports on the neuroeconomics sessions at the AEAs. He is justifiably impressed with the work of David Laibson. Laibson has pioneered the theory and implications of hyperbolic discounting.
But a clever economist can always come up with a rational (time-consistent) model to explain what appears to be irrational hyperbolic discounting. Laibson, however, uses fMRI scans to show that different parts of the brain are activated when making decisions at different time-scales. As Andrew notes, the isolation of the different decisions to different parts of the brain gives Laibson’s argument significant credibility against more standard neo-classical explanations for the same phenomena.
Does it? As I understand it, explanations from rationality are a species of functional explanation. Rationality is a function of the brain. Function, however, is distinct from mechanism. And fMRI scan will reveal something about a mechanism. But it will not reveal the function of that mechanism, or the absence of function.
One has to be Bayesian about this – it’s not a question of prove or refutation but of evidence. Suppose Z=f(x,y) and someone argues that x and y are chosen to maximize Z. If it turns out that x and y are chosen by different people that, all else being equal, ought to reduce the probability that Z is maximized.
It is not new that different parts of the brain light up when people
are engaging in apparently different kinds of thinking. The Ur-paper
on neuroecon that may yet win a Nobel is the 2001 one in the PNAS by
McCabe, Dickhaut, Houser, and Smith (with Houser and McCabe apparently
being the only ones out of Vernon Smith’s shop remaining at GMU, or so
I hear). The big finding? That when people are playing prisoner’s
dilemma games, different parts of the brain light up if they are
contemplating cooperating or if they are contemplating “cheating,”
aka “being economically rational and going to the Nash equilibrium”
Amusingly, in fact tellingly, it is when one is thinking about cooperating
that the prefontal cortex lights up, the area long thought to be the main
seat of “rational intelligence.” This reflects the complaint of the
mathematician who was playing with the economist Armen Alchian in the
first repeated PD game experiment at Rand back in the early 50s (Dresher
and Flood), who kept being annoyed by Alchian’s repeated tendency to
“selfishly” cheat: “Why is this guy so stupid?”
that the
Economists need to be convinced at very single step of the way that their model is wrong and that they ought to discard their assumptions and accept biological assumptions. What incredibly slow and stubborn learners they are. Faith dies hard.
Social science ought to be based on biological science and Darwinian evolution.
Unified decision maker: It is an obvious illusion.
Perhaps skydiving was a bad example (having never done it, I wouldn’t know), but motor sports wasn’t. Your average person may think that racing around a track at 150 mph is scary, extremely difficult, or maybe insane. But its actually a rather easy thing to learn (at least, to learn mildly well, no where near a pro’s level), and becomes routine after a while. The professionals who participate in motor sports (or similar activities) don’t get a “thrill” out of it (maybe they did their first time?). With the exception of a few hot-heads who hopefully do not remain in the sport for long, they are professionals. They do their job with surgical precision.
You mentioned rewards for that behavior. Where there are incentives for people to overcome pre-programmed behaviors, I think they will often do so.
I just don’t see much of a difference here between the race car driver and the professional investor. Both attempt to do things that are utterly alien to the environment which humans evolved in, and both utilize whatever non-human (computer) tools are available to do so.
Those who plan poorly for the future will generally tend to spend their money rather than accumulate it. This seems like a good thing to me, because more of that money will end up in the hands of people who do not exhibit temporal errors in their decision-making: the professional investor. I would think that would lead to better investing and therefore capital distribution.
Although I suppose this is much more of a Neoclassical blog than an Austrian one, so the Neoclassical assumptions of rationality are probably more directly challenged?
Seems to me that by the point neoclassical economists are resorting to this sort of objection, they’ve hit the point where they’re explaining away the data that look like irrational hyperbolic discounting rather than explaining them. You can’t just come up with an arbitrary mathematical model ex post: there has to be some theoretical justification for your model other than that it’s consistent with your preexisting theory, unlike the simple, obvious explanation proposed by your opponents.
So I don’t really disagree, but I think you’ve given neoclassical economics a little bit too much credit.
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