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Is Behavioral Economics Doomed?

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Disciplines
  • Economics
  • Political Science

Abstract

Microsoft Word - mso18F.doc Is Behavioral Economics Doomed? The ordinary versus the extraordinary1 Max Weber Lecture June 8, 2009 David K. Levine2 1 I am grateful especially to my coauthors Drew Fudenberg and Tom Palfrey with whom I’ve worked and discussed these issues for many years, to Ramon Marimon, the Max Weber fellows of the EUI, to Karin Tilmans for careful proofreading and to NSF grant SES-03-14713 for financial support. 2 Department of Economics, Washington University in St. Louis. Email: [email protected] 1 Introduction As Max Weber was a professor of economics, it is perhaps appropriate to discuss modern “behavioral economics” in a lecture in his honor. Indeed – modern economics has returned to many of the issues that fascinated Weber, ranging from political economy to the theory of organizations. Behavioral economics purports to be instrumental in these extensions – my goal in this lecture is to address the question of what – if anything – behavioral economics brings to economics. Certainly behavioral economics is all the rage these days. The casual reader might have the impression that the rational homo economicus has died a sad death and the economics profession has moved on to recognize the true irrationality of humankind. Nothing could be further from the truth. Criticism of homo economicus is not a new topic. In 1898 Thorstein Veblen wrote sarcastically rational economic man as “a lightning calculator of pleasures and pains, who oscillates like a homogenous globule of desire of happiness under the impulse of stimuli.” This description had little to do with economics as it was practiced then – and even less now. Indeed, for a long period of time during the 60s and 70s, irrational economic man dominated economics. The much- criticized theory of rational expectations was a reaction to the fact that irrational economic man is a no better description of us than that of a “lightning calculator of pleasures and pains.”

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