THE BIZOP NEWS

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David Sloan Wilson thinks that our current economic situation is a reflection of our bankrupt economic thinking.

"The collapse of our economy for lack of regulation was preceded by the collapse of rational choice theory.

It became clear that the single minimalistic principle of self-interest could not explain the length and breadth of human behavior.

Economists started to conduct experiments to discover the actual preferences that drive human behavior.

The field of experimental economics was born and two of its founders (Vernon Smith and Daniel Kahneman) were awarded the Nobel Prize in 2002."

Well, this is just false.

Vernon Smith's work in experimental economics has generally showed how markets cleared at prices and trades predicted by simple supply and demand curves. While his later work has emphasized how the road to equilibrium is through bubbles and crashes, there is a predictability about these cycles - a predictability notable absent in our current markets.

Tversky and Kahneman's work on choice is a series of illuminating counter-examples to various axioms in choice theory, all rely upon on framing a simple decision in two mathematically equivalent ways, but which people systemically treat differently. This line of work is quite radical as it attacks the core concept of all natural sciences: invariance. Invariance, the principle that a physical system can described by a mathematical system remains the same physical system under certain transforms of the system, has allowed our natural science to progress. With Tversky and Kahneman's work, this easy reliance on invariance is probably unsupportable.

On the other hand, there is a field of psychology which is directly relevant to the issue of how to stop people rationalizing away their incredibly risky behavior, cognitive dissonance.

Here is a nice example, recently reported by the Washington Post, of how to effectively employ the science of cognitive dissonance. The example had to do with changing people's behavior, engaging in safe sex. Everyone understands the statistical risks, but that understanding does not translate into a change in behavior. Why not? And what can be done about it?

"I convince myself the scientific data is not really all that good or my uncle Hymie smoked for 87 years and he is 95 now [or] the filter tip does trap all the cancer-producing agents," Aronson said. "I find a way to sleep at night even though I am doing something incredibly stupid."

I turns out that the best way to get people to change their risky behavior is to a) have them become spokesman for the cause, and b) to have these testimonials made public, and c) and to demonstrate their hypocrisy when they backslid.

In my opinion, clear examples like this of how to bring about change in behavior are far more useful than any of the little tricks we find in what is now called behavioral economics.