The “false dilemma” also called the “black or white” fallacy is the logical fallacy in which only two alternatives are presented while other alternatives are possible. Keep that in mind as you read this article by Antara Haldar at Atlantic:
Economists’ resistance to incorporate the wisdom of behavioral approaches may seem like a frivolous concern confined to the ivory tower, but it has serious consequences. What students are taught in their economics classes can perversely turn models and charts that are meant to approximate reality into aspirational ideals for it. Most economics majors are first introduced to Homo economicus as impressionable college freshmen and internalize its values: Studies show, for instance, that taking economics courses can make people actively more selfish. The consequences are only made more acute by the fact that business, a more preprofessional version of economics, is the single most popular major for college students in the United States—some 40 percent of undergraduates take at least one course in economics. That behavioral economics has been minimized and treated as an aberration by the mainstream has major bearings on how students make sense of markets and the world.
There are such things as first and second order approximations. When you’re dealing with the real world, sometimes those are good enough. A first order approximation is certainly better than throwing up your hands and deciding that most of what we experience in life is unexplainable because the offered explanation doesn’t deal with 100% of the cases or even deals with 100% of the cases only approximately.
I just couldn’t wade through the entire article because an underpinning assumption is just flat damned wrong. Homo economics exists only in the authors mind.
I’m reminded of a point I’ve made a number of times here. Many assume Gene Fama and his efficient market hypotheses were grounded in the notion that people were perfectly rational and had, and acted upon, perfect information. No. He (and later with futures pricing work with Fisher, who’s class I also took) simply did statistical analysis to investigate whether or not data series, most particularly the last datapoint, contained information that was predictive for the next – n+1 if you will – datapoint. It did not. The conclusion was that all available information traveled quickly and was acted upon quickly, as best the decision makers could. It decidedly did not conclude that the information was perfect or perfectly complete, or the decision makers were perfectly rational. Just that you couldn’t trade on the statistical residual error function. It was random. There’s no information there.
Anyone who has been in the investment business knows that time dependent, and especially active investment, is subject to imperfect information and irrational thinking. But it appears that only highly quantitative trading activities in things like options contain brief periods of “improper†pricing that is tradable. These are small, fleeting and must be acted upon quickly, like with exotic algorithms programmed into computers.
I don’t know if that really goes to your concluding comment point, but the articles author is just dealing jive.
PS – based upon comment volume, I think Christmas Party season has hit.
My point was that even if single economic decisions were irrational, over time and in aggregate they trend towards rational outcomes. The opposite view is obviously incorrect. If it were people would always buy products they hate and pay random amounts for them. They don’t.
I think Drew is correct for the broad group of conservatives who are not politically active. For those who are active, and interested in economics, homo economicus is very much alive. Go read the libertarians and it is a more common beluef for them. They will outright reject empirical outcomes if they disagree with their beliefs. Again, not all, and on the plus side the libertarians are usually a bit less driven by political beliefs.
Steve