Thursday, April 19, 2018

Can Nudging Become A New Road To Serfdom?

Last weekend I attended a conference at NYU Law School on "Behavioral Economics and the New Paternalism, organized by Austrian economist Mario Rizzo and classical liberal law professor Richard Epstein. It included economists, lawyers, philosophers, and a couple of psychologists.  While there was a range of views present a theme for many and especially of the organizers was bashing the ideas about "libertarian paternalist" nudging advocated by Richard Thaler, winner of the most recent economics Nobel Prize, and Cass Sunstein.  In particular, Rizzo and participant Glen Whitman have written a book charging the nudgers with advocating a creeping totalitarianism with their advocacy of governments nudging people to do what governments think is best for them.  While there were no full-blown Thaler defenders at the conference, the more philosophically oriented attendees rose to the bait and argued against the anti-nudgers, with an especial sharp debate happening between Epstein and Robert Sugden a philosophical economist from East Anglia in England.

Pethaps the most substantial anti-nudge and also critical of behavioral economics paper came from George Mason law professor, Todd Zywicki.  While he overdid it a bit he argued with some good reason  that most legal decisions in the US relying on claimed behavioral economics foundations, especially on matters involving credit and consumer finance issues, have been seriously flawed.  They have either relied on misinterpretations or else mere assertions that have not been empirically demonstrated.  He raised a point of more general interest in charging that there has been a problem of "citation cascades," where a string of decisions have been based on people citing people citing other people in a cascade that eventually boils down to an initial claim that has no clear basis.  He noted several of these where the original argument was mere speculation in a paper by Thaler for which no empirical support was provided, but then people quoted his opinion as proof and then quoted each other quoting him, and so on.

Much less polemical but more serious intellectually were papers by Gerd Gigerenzer and Nathan Berg.  The former directs a branch of the Max Planck Institute in Berlin and has written an important book with the late Reinhard Selten.  Berg was a professional jazz musician before he became an economist, now based in Otago, New Zealand.  I have published a paper in my journal, ROBE, on their general themes, which draw on ideas of Herbert Simon and his bounded rationality.  In particular Gigerenzer pointed out lots of cases where people doing things that look supposedly irrational for one reason or another in fact lead them to perform better than supposedly rational actors.  So there may be a hot hand after all and the "gambler's fallacy" may actually make money.  One point is that sample parameters may not be the same as population ones.  Even being inconsistent may actually allow one to perform better than consistently.  So to the extent nudge paternalism is supposed to help people overcome hurtful damaging of themselves, well, it may not really help them.

The philosophical defenders of the nudge agenda appealed to multiple selves theory, among other things.  One problem was that some of the nudge critics denied findings of behavioral economics that hold.  So Richard Epstein denied the endowment effect, noting that most experiments about it have involved undergrads and coffee mugs, demanding more for ones they have been given than they are willing to pay for ones they do  not own.  Epstein argued that coffee mugs are not a big part of the economy.  Also, he and others cited papers by Plott and Zeiller that showed it is possible to structure these experiments so that the effect disappears.  However, Sugden and others noted that this is a special case, and that generally the endowment effect holds and does so in important and large scale situations.  So people will demand much more compensation for giving up some wilderness area than they are willing to pay for more of it.

I noted that this is like the matter of the ultimatum game, where people tend to refuse what they consider unfair offers, even though it costs them money to do so.  Over 30 years ago Ken Binmore showed that it was possible to set up ultimatum game experiments where the usually found effect disappears.  But the oddity of that result in the end shoed that Binmore's result was an exception.  The ultimatum game result is very robust.  People really do care about fairness.

Economic philosopher Daniel Hausman of Wisconsin presented a middle ground, partly supporting the multiple selves and meta-preferences view (so government might nudge one towards one of one's better selves, e.g. trying to discourage an 18 year old from smoking), but focused more on the means involved, the method of nudging.  Thus, informing and encouraging is one thing, but deception and coercion are another, although Thaler and Sunstein claim to oppose coercion for sure.  As it is in the real world, the line between some of these things, which opens the door for the slippery slope critics who warn of these possible new roads to serfdom.

Barkley Rosser

9 comments:

Eubulides said...

Was Sarah Conly there?

She's for more of a "in your face" kind of paternalism...

http://www.cambridge.org/us/academic/subjects/philosophy/political-philosophy/against-autonomy-justifying-coercive-paternalism?format=HB&isbn=9781107024847#ytml20M0KIPx0iXY.97

rosserjb@jmu.edu said...

Yes, she was. Very thoughtful.

AXEC / E.K-H said...

Overreach: economists have their fingers in every pie except in real economics
Comment on Barkley Rosser on ‘Can Nudging Become A New Road To Serfdom?’

Until this day, economists have no clue of what their subject matter is. While the sciences have specialized, economists follow the Renaissance ideal of the homo universalis.#1 Accordingly, they dabble in Psychology, Sociology, Political Sciences, Geopolitics, Law, History, Anthropology, Social Philosophy, Philosophy, Theology, Pedagogic, Biology/Evolution, Climatology, and what not.

People become progressively aware that in all these disciplines economists have not contributed anything of scientific value: “While he [Todd Zywicki] overdid it a bit he argued with some good reason that most legal decisions in the US relying on claimed behavioral economics foundations, especially on matters involving credit and consumer finance issues, have been seriously flawed. They have either relied on misinterpretations or else mere assertions that have not been empirically demonstrated. He raised a point of more general interest in charging that there has been a problem of ‘citation cascades,’ where a string of decisions have been based on people citing people citing other people in a cascade that eventually boils down to an initial claim that has no clear basis.”

This is not correct. Economics has a clear basis and it is given with the set of neo-Walrasian axioms: “HC1 There exist economic agents. HC2 Agents have preferences over outcomes. HC3 Agents independently optimize subject to constraints. HC4 Choices are made in interrelated markets. HC5 Agents have full relevant knowledge. HC6 Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states.” (Weintraub)

Economists simply apply this set of behavioral assumptions or slight variants thereof or the subset of optimization-and-equilibrium to any question they come across. The tragicomedy is that this methodology has crushingly failed in their own field. Economists can to this day not tell how the price- and profit-mechanism works or what profit is.#2, #3

The methodological blunder of economists and the ultimate reason why economics is one of the worst scientific failures of all times consists in defining economics as a social science.#4, #5

So, the definition of the subject matter has to be changed:
Old (behavioral): Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.
New (systemic): Economics is the science which studies how the monetary economy works.

Orthodoxy and traditional Heterodoxy is lost for science. Economists cannot be taken seriously ― not when they speak about the economy and still less so when they blather about nudging as the new road to serfdom.

Egmont Kakarot-Handtke

#1 Wikipedia, Polymath
https://en.wikipedia.org/wiki/Polymath

#2 Economists’ three-layered scientific incompetence
http://axecorg.blogspot.de/2016/02/economists-three-layered-scientific.html

#3 Mental messies and loose losers
http://axecorg.blogspot.de/2015/07/mental-messies-and-loose-losers.html

#4 Economics is NOT a social science
http://axecorg.blogspot.de/2016/08/economics-is-not-social-science.html

#5 For details of the big picture see cross-references Not a Science of Behavior
https://axecorg.blogspot.de/2015/12/behavior-cross-references.html

rosserjb@jmu.edu said...

One reply, Egmont. Sorry, you are wrong here. Behavioral economics is not based on neoclassical axioms, either the actual Arrow-Debreu ones or the silly set that you always quote from Weintraub. Indeed, you have forgotten, but some time I ago I got you to briefly recognize that experimental economics is actually reasonably scientific, something goes against your constantly repetitive ranting about how economics is not scientific. Much of behavioral economics depends on experimental economics, and results from such experiments were at the heart of quite a few of the presentations at this conference.

BTW, you do not get Zywicki's point. He is not against behavioral economics as such. Indeed, his point is that when the legal system has relied on behavioral economics it has done so inappropriately by either misinterpreting the arguments or relying on citation cascades that ultimately go back to assertions not based on empirical data. Zywicki does not say the actual arguments or empirical studies themselves are wrong or unscientific, quite the opposite.

And if you need reminding, check on the work of Nobel Prize winner, Vernon Smith, still alive and very professionally active at age 91. I challenged you on this once before, and you actually briefly admitted he might be doing scientific work, before you reverted to your usual vacuous mantras that do not include behavioral or experimental economics in your list of all the supposedly unscientific theories. So, deal with it, Egmont. You are not on top of it here in your argments, and you seriously fell on your face with this one.

AXEC / E.K-H said...

Barkley Rosser

Alone the titles of your posts ‘Can Nudging Become A New Road To Serfdom?’ or ‘Anniversary of Yeshua bin Yusuf dying on a cross’ tell everybody that you never understood what science is all about.

The dabbling of economists in Psychology, Sociology, Political Sciences, Geopolitics, Law, History, Anthropology, Social Philosophy, Philosophy, Theology, Pedagogic, Biology/Evolution, Climatology, etcetera has never been anything else than dilettantish overreach, nuisance, and nerviness. All the more so, because economists messed up their own field in all dimensions and never rose above the proto-scientific level.

The lethal blunder of the microfoundations approach does NOT lie in any specific behavioral assumption like constrained optimization or bounded rationality but in the methodological incompetence of economists to realize that NO way leads from the second-guessing of Human Nature/motives/behavior/action to the understanding of how the economic system works.#1, #2

ALL human-centered/behavioral approaches invariably crash against the methodological wall of the Fallacy of Composition. NO way leads from the assumption of profit maximization to the macroeconomic Profit Law.#3 And this explains why the microfoundations approach has been doomed to failure from the very beginning in the 1870ies.

Behavioral economics or Vernon Smith’s market experiments is partial analysis and the results of partial analysis cannot, as a matter of methodological principle, be generalized. From Vernon Smith’s market experiments cannot be concluded that the market economy is a self-adjusting system.

The fact of the matter is that correct macrofoundational analysis proves that the market economy is unstable and that it will eventually break down.#4 You can do behavioral experiments until you are blue in the face but this will not yield any results as to how the market system works.

Microeconomics has always been the playground of microbrains.#5

Egmont Kakarot-Handtke

#1 Dear philosophers, economics is a system science
https://axecorg.blogspot.de/2017/11/dear-philosophers-economics-is-system.html

#2 The economist as second-guesser, mind reader, and folk psychologist
https://axecorg.blogspot.de/2016/07/the-economist-as-second-guesser-mind.html

#3 Ricardo and the invention of class war
https://axecorg.blogspot.de/2018/02/ricardo-and-invention-of-class-war.html

#4 Capitalism, poverty, exploitation, and cross-over exploitation
https://axecorg.blogspot.de/2018/04/capitalism-poverty-exploitation-and.html

#5 Economists: Standing on the Shoulders of Gnomes
http://axecorg.blogspot.de/2018/04/economists-standing-on-shoulders-of.html

rosserjb@jmu.edu said...

Only one followup here. Do keep in mind, Egmont, that among the most important of experiments done by Smith and some of his associates, dating originally from 1988 in Econometrica, but followed up by many since, show that many markets are seriously vulnerable to destabilizing speculative bubbles, even when agents are fully informed about market conditions. This is a robust result.

I know that you really do not know anything about this stuff. You need to do some actual studying rather than just writing more and more unpublishable repetitions of your standard rants.

AXEC / E.K-H said...

Barkley Rosser

You are off track. The point at issue is NOT the market experiments of Vernon Smith and others but that the subject matter of economics is ill-defined.

Imagine a physicist is asked to figure out how the universe works and after some time he comes back and says: The universe is much too large, not of direct relevance to our daily lives, and ultimately incomprehensible, so I have analyzed the molehills in my front garden — with surprising results.

If you want to understand the universe it is of no use to thoroughly examine molehills and if you want to understand the economy it is of no use to second-guess Human Nature/motives/behavior/actions.

Macro is about the economic universe and micro is about mole-psychology-sociology. Behavioral economists are unable to look beyond their molehill horizon. But the methodological fact of the matter is that NO amount of molehill research ever leads to the understanding of how the universe works and NO way leads from the understanding of human behavior to the understanding of how the market economy works.#1, #2

This explains why the microfoundations approach has failed. However, from textbook to peer review to the fake Nobel, economists still cling to their false methodology: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals.” (Arrow)

After 140+ years of methodological blunder, it is time for the paradigm shift from bottom-up to top-down.#3 Hitherto accepted economists are no longer accepted.

Egmont Kakarot-Handtke

#1 Economics, methodology, and the Molehill Impossibility
https://axecorg.blogspot.de/2016/12/economics-methodology-and-molehill.html

#2 Economics is NOT about Human Nature but the economic system
https://axecorg.blogspot.de/2017/05/economics-is-not-about-human-nature-but.html

#3 If it isn’t macro-axiomatized, it isn’t economics
http://axecorg.blogspot.de/2017/02/if-it-isnt-macro-axiomatized-it-isnt.html

rosserjb@jmu.edu said...

For behavioral macro, Egmont, see either the presidential address to the AEA (especially that) or the Nobel Prize address by George Akerlof.

AXEC / E.K-H said...

Barkley Rosser

Akerlof’s AEA address is a fine summary of the multiple idiocies of microfounded macroeconomics. Just take the microfounded = behavioral Phillips curve and the macrofounded = structural Phillips curve.#1

The microfoundations = behavioral approach is a scientific lemon since Jevons/Walras/Menger but you have not realized it to this day. Methodologically it holds: If it isn’t macro-axiomatized, it isn’t economics.

Behavioral economics has never been more than rather trivial folk psychology/sociology, i.e. an overreach of incompetent economists who do not understand since 200+ years the very basics of their own subject matter.#2, #3

Egmont Kakarot-Handtke

#1 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2130421

#2 Ricardo, too, got profit theory wrong. Sad!
https://axecorg.blogspot.de/2018/02/ricardo-too-got-profit-theory-wrong-sad.html

#3 Infantile model bricolage, or, How many economists can dance on a non-existing pinpoint?
https://axecorg.blogspot.de/2018/04/infantile-model-bricolage-or-how-many.html