Comments (30)

• M E Hoffer

  Does this: "He usually pays credit card bills as soon as they arrive instead of waiting until they're due, even though "it doesn't make any sense economically.", contain the improper use of: "economically"?

  Doesn't the individual, the quoted, mean, properly: "financially"?

  Am I incorrect in thinking that those two terms are wholly different, and Not interchangable?
  

  Published: June 6, 2006 8:08 AM

• Person

  M_E_Hoffer: It's actually common for mainstream publications to confuse 1) what economics *expects* will happen or 2) what politcal framework an author advocates with 3) what someone is saying people *ought to* do. For example (and I just brought this up yesterday) there was a Time magazine article about Apple Computer's very closed, regimented system for product development, and the author was saying that this somehow "violated Adam Smithian principles" because people are "supposed" to share their secrets with others so there can be free competition. Never mind that Adam Smith wrote about the benefits of an economy characterized by free competition, not one in which you're "supposed" to help your competitors to ensure you'll have more competition. You're right about the error in wording there, I think.

  Published: June 6, 2006 8:16 AM

• David

  the quote 'Standard economic theory says that people should postpone bad outcomes for as long as possible.....' is indeed wrong. But missing from Mr Murphy's ( entirely cogent) reasons for its incorrectness is the most fundamental one:

  Standard economic theory ( whoever's standard, come to that, with the possible exception of Keynesian) is silent on any form of 'should'. And on what constitutes 'bad', come to that. What is good or bad ( and hence what one 'should' do) depends on the state of mind of the decider facing a choice.

  All theory does is to illuminate the likely consequences of the alternatives should they be chosen. The desirability of one choice over another is not something that can be addressed from within any economic theory. come to think of it, its not something that can be addressed by any scientific theory at all.

  As Richard Feynman ( not an economist) said ( quoted from memory):

  ' science merely seeks answers to the question: 'If I do this, what will happen?' It cannot answer the question : 'Should I do this?'

  The statement is thus nonsensical ab initio. funny, even non-economist scientists in white lab coats should know better.

  Published: June 6, 2006 8:43 AM

• Matthew

  I was exposed to some behavioral economics as a grad student. It's one of the more dangerous sub-fields of modern mainstream economics from a liberty loving standpoint. The majority of research uses findings from pyschology showing so-called errors in rational judgement, and here comes the expected punchline, which is then used to justify why government is needed to correct the behavior. There's even a paper by Loewenstein and a bunch of others called "Paternalism for Conservatives" or something of that nature.

  Published: June 6, 2006 9:01 AM

• Harry Valentine

  There are any number of cult gurus (some in ashrams) using twisted psycho-babble to promote their ideas of psychological economics. They invariably go far beyond the twisted babble published by Keynes or some of the ludicrous statements made before the US congress by Alan Greenspan (who allegedly increased the money supply to mimic events that would have occured under a gold standard . . . . Mark Skousen called his bluff on this one).

  The psycho-economic gurus usually insulate themselves from criticism on their flawed and ludicrous economic theories.

  Published: June 6, 2006 11:36 AM

• Student

  I'm confused and a little disappointed.

  First, is Murphy saying that the inights into human behavior provided by neuroscience are irrelevant to economics or already incorporated in economic "principles"?

  Second, isn't Murphy batting at softballs here? What about the more interesting results provided by neuroscience and psychology? For example, recent evidence that we humans don't know how happy we were in the past or what will make us happy in the future? This research was presented recently in a popular book by Daniel Gilbert entitled "Stumbling on Happiness".

  Surely you can't argue this doesn't contradict the way economists (even Austrians) think about human behavior.

  Published: June 6, 2006 3:17 PM

• Joe

  Robert Murphy writes ...

  "For most people, the money used to pay a monthly credit card bill is sitting in a fractional reserve checking account, and that's why paying your credit card bills right away makes perfect sense."

  Can some one explain in more detail how does that make perfect sense? For example, if someone gets paid on the 15th and 30th of the month, has a mortgage payment due on the 1st, and receives a credit card bill at month-end but which is due somewhere after mid-month, how does it make perfect sense to pay it right away, i.e., on the 30th/1st?

  Also, say the credit card company offers automatic (ACH debit) payments (meaning the person can't forget, even if they have an accident or whatever), how is it better not to take advantage of such an arrangement (which postpones payment until the very date the bill is due--and avoids any interest charges if the bill is paid in full)? Or alternatively, schedule an automatic payment through a bill payment service?

  Published: June 6, 2006 5:43 PM

• Joshua Katz

  Student:
  I can't speak for Murphy, but I don't think its true that neuroscience provides any insight into behavior. Instead, it provides insight into the physical manifestations of psychological facts known since time immemorial. It also sometimes is used to justify patently false things.

  Joe:
  A more fundamental point is that Austrian economics, and 'basic economic principles' can handle uneconomic behavior. In any event, Murphy already explained one way that paying early can make sense - concern about the risk of a late payment, which carries far more cost than the benefit gained by delaying payment in many situations. In some situations, of course, it doesn't make economic sense. One such situation is credit card companies that provide automatic payment arrangements, as you mention.

  Published: June 6, 2006 8:23 PM

• Joe

  Joshua:

  Maybe it's just me, but I've always delayed payment until close to the due date, even before such conveniences as autopay and bill pay services. Unless someone is habitually late, the risk of a late payment is minimal, I'd say, in the order of one in 100 or better.

  What I was more puzzled by was Murphy's mention of "fractional reserve" checking account. Maybe he meant that the money is simply sitting in a non-interest bearing account, so it's not earning interest to compensate for late fees or finance charges on the credit card. In other words, I can't see why it would matter if the checking account was fractional reserve or backed in full by bullion.

  Published: June 6, 2006 9:01 PM

• Student

  Joe,

  I would recomend reading up a little before you say that it provides no insights. Here is a good summary of behavioral economics (of which neuroeconomics is a subset).

  http://www.iies.su.se/nobel/papers/Encyclopedia%202.0.pdf

  Published: June 6, 2006 10:49 PM

• Larry Ruane

  David, I don't think the statement by the CNN writer ("Standard economic theory says that people should postpone bad outcomes for as long as possible.....") was intended to be a normative statement; I did not interpret it that way. I think it's just a prediction; he's saying that economic theory predicts that people will (by and large) behave this way.

  Published: June 6, 2006 11:16 PM

• averros

  It is always a good idea to poke holes in bad science.

  However, Austrian economists should welcome "intrusion" of the other sciences, since in the end it will only serve to strengthen the position of the Austrian economics as the only scientific economics. In the real hard science all disciplines are interlinked by a miriad of relationships, which meld the science into a coherent whole.

  And, yes, how human ethical systems form and work and the ways the subjective utilities are computed by the brain are valid targets for research, and have the potential to make the largely qualitative Austrian economics (which currently holds the only honest position on subjective values - namely that we don't know how they work, so we must treat humans as "black boxes" to obtain valid predictions) into a quantitatively predictive science, at least in some limited sense.

  Published: June 7, 2006 4:46 AM

• Joe

  To Student:

  Please note that the one who made the comment about neuroscience's insights into behavior was Joshua Katz (at the same time he posted a comment addressed to me).

  Published: June 7, 2006 9:16 AM

• quasibill

  "Unless someone is habitually late, the risk of a late payment is minimal, I'd say, in the order of one in 100 or better."

  Yes, but you also have to factor in the magnitude of the consequence - a 1 in 100 chance of having to pay a significant fee and have your credit score possibly dinged is different from a 1 in 100 chance of stubbing your toe.

  Furthermore, my personal experience in this respect is that when I tried to be "rational" and pay on the last day, I inevitably got busy and forgot, or the bill got buried under the avalanche of mail I receive daily that I can't process until the weekend. It's just easier for me to pay when my mind is on it.

  Furthermore, as I learned that the true rate of inflation is much higher than what is published by the gov., and my interest rates in my savings account is below what the government rate of inflation anyway, I realized that I wasn't really saving much value, if any, by delaying payment. I think that is part of the point about fractional reserve banking.

  Published: June 7, 2006 10:01 AM

• Paul Edwards

  Student,

  “For example, recent evidence that we humans don't know how happy we were in the past or what will make us happy in the future? This research was presented recently in a popular book by Daniel Gilbert entitled "Stumbling on Happiness".

  “Surely you can't argue this doesn't contradict the way economists (even Austrians) think about human behavior.�

  It doesn’t contradict Austrian theory, nor does it augment it. Human action is always exclusively in the realm of ex ante expectations of the future results of present actions. Austrians have always explicitly acknowledged that the actor’s ex ante assessments may not be reflected in his perceptions of the results ex post. Nevertheless, action must always be based on ex ante expectations and can never be based on ex post assessments of the results of these actions.

  Published: June 7, 2006 10:34 AM

• BobMurphy

  Hi all,

  The "fractional reserve" reference wasn't really relevant; I was just being a crotchety Austrian and complaining about the government.

  I don't dismiss all of the behavioral stuff; I took pains in the intro and conclusion to say that. What I _do_ object to is when they overstep and think that economic principles (as opposed to modern models) are wrong.

  Can the fans of the new stuff give me a better example than early credit card payments? E.g. economics (in my definition, not Lowenstein's) would say "People act to increase their expected utility." There is no way to contradict this. Even if people don't know what they really want, their actions will not contradict this statement.

  Now you can say that such tautologies are useless; fair enough. But economics as the Austrian conceives it is made up of airtight deductions.

  Published: June 7, 2006 4:56 PM

• Paul Edwards

  Bob,

  “Now you can say that such tautologies are useless…�

  … but we would answer that you are grossly mistaken (ha ha)…
  

  Published: June 7, 2006 5:09 PM

• Student

  Paul,

  You apparently don't understand the implication of what these findings mean. What you just said is no different from the way neoclassical mico handles decision making (though Austrians like to pretend otherwise).

  This isn't just saying that people maximize their utility based given established preferences, information, and expectations of the future. And that results may vary. If that's all it was saying, no one would be interested. Thouh Austrians also like to pretend that "everyone else" is totally stupid.

  This throws our assumption that people even maximize utility into question. Or however you want to phrase that in cute value scale language.

  Plz to read the link I posted before commenting on how its contents irrelevant or worthless.

  --DW
  

  Published: June 7, 2006 9:48 PM

• Paul Edwards

  Student,

  “You [I] apparently don't understand the implication of what these findings mean... Plz to read the link I posted before commenting on how its contents irrelevant or worthless.�

  From the abstract of your link:

  "...We then discuss three important ways in which humans deviate from the standard economic model. Bounded rationality reflects the limited cognitive abilities that constrain human problem solving. Bounded willpower captures the fact that people sometimes make choices that are not in their long-run interest. Bounded self-interest incorporates the comforting fact that humans are often willing to sacrifice their own interests to help others."

  Correct me where I am wrong in my interpretation of these three important causes of deviation from the Austrian economic model:

  1. Bounded rationality: we might be wrong about our actions leading to the best results. We may be wrong about what the best results are to aim at.

  2. Bounded willpower: we might not do what we (or others) think is in our long term best interests because we are weak willed.

  3. Bounded self-interest: not all of our values and ends are contained in strictly monetary concerns.

  Did I get it? If so, then do Austrians account for and understand these? Yes, yes, and yes. We know these things already.

  1. Austrians acknowledge that people are not omniscient, that they can make mistakes, and that what they thought was the best action to obtain what they thought would be the best result, may in fact be wrong on one or both counts, ex post. What is important in economics is the ex ante perceived optimum means and ends; it is all economists can know and work with.

  2. A person may put a vice, laziness, idleness or procrastination and all other very short term considerations ahead of ambitious long term interests as the values which guide that person’s action. Economics acknowledges that all values are included and weighed by the individual in deciding what action he will take and what future result is most important to him. If present oriented enjoyment of leisure now trumps earning more for their future interests, then it will be the overriding end, and means chosen will reflect this. This is not news to the Austrian.

  3. A person maximizes his total psychic utility, not just his financial situation. This is why a person buys a car rather takes a bus everywhere; lives in a big house rather than lives in a small apartment; takes vacations, rather than takes a second job; pays for his children’s education rather than buy a new car, and enjoys his lower paying job, rather than struggles at a higher paying job. Economics accounts for this.

  Mises’s “Human Action� covers all this and more in greater detail. The fact is psychology rather than economics may explain the reason someone values a particular end; but it is economics that describes the implications of the fact that humans choose and use means to obtain these given desired ends.

  Published: June 8, 2006 12:54 PM

• banker

  It would be nice if economists (mostly keynesian) would admit their theories are wrong rather than create new theories to try to patch up the old, broken thoeries. That is what happens when someone tries to make reality fit their model rather than the other way around. Also, this is probably a consequence of using economic theory to make government policy decisions.

  Published: June 8, 2006 1:13 PM

• Student

  Paul Edwards,
  
  Well that actually IS NOT what I was talking about, but that's my fault for directing you to the wrong link. I thought I had posted this link before.

  http://emlab.berkeley.edu/users/rabin/peboth7.pdf

  Go to section 4 on maximizing utility. If you can please explain how this has been incorporated into Austrian Economics, then I will gladly kiss your bum.

  Published: June 9, 2006 9:55 AM

• Paul Edwards

  Person,

  “The research on heuristics and biases reviewed in Section 3 indicates that people misjudge the probabilistic consequences of their decisions. Research presented in this subsection suggests that, even when they correctly perceive the physical consequences of their decisions, people systematically misperceive the well-being they derive from such outcomes.�

  I believe this is point 1, my interpretation of “Bounded Rationality�.

  “How do people misperceive their utilities? One pattern is that people underestimate how quickly and how much they will adjust to changes, not foreseeing that their reference points will change. In a classic study, Brickman, Coates, and Janoff-Bulman (1978) interviewed both lottery winners and a control group; the researchers found virtually no difference in rated happiness of lottery non-winners and winners.�

  Yes, this section appears definitely to elaborate on “Bounded Rationality�. So I don’t know if I answered this adequately before, so in different words my answer is this: The actor will not modify his choice of ends and means even if he is acutely aware that his ex post assessment of them may turn out to be different then his ex ante perspective. Before he actually acts, he can only know how he anticipates he will enjoy the outcome, and it is always strictly in accordance with this anticipation that action is dictated.

  In economics, it does not matter how well psychologists understand how and why people wrongly anticipate how much they will enjoy the outcome of their actions. The bottom line is, all decisions to act are based on perceived anticipated results, not on actual final perceived results. And of course, the reason for the deviation between anticipated enjoyment before the action, and actual enjoyment after the action has been taken also, therefore, has no bearing on human action and economics.

  This is not to say psychology is not useful or valid. It simply cannot contribute to economic theory because psychology is necessarily outside of the domain of economics.

  Published: June 9, 2006 10:53 AM

• M E Hoffer

  P.E.,

  You had me in agreement until :"This is not to say psychology is not useful or valid. It simply cannot contribute to economic theory because psychology is necessarily outside of the domain of economics."

  Could you please elaborate on this? Specifically: "It simply cannot contribute to economic theory because psychology is necessarily outside of the domain of economics."

  Published: June 9, 2006 11:08 AM

• Paul Edwards

  M E,

  Well, it seems that way to me at least.

  What I’m thinking is this: there is nothing that we can learn or forget about in psychology that influences the truths obtained from praxeology and the way we apply it to economics. At least none that i can think of.

  So for instance it is possibly true that psychologically, "the grass is always greener on the other side", is true and implies we may be wasting our time in getting to the other side, since the grass will turn out to be not greener at all. This, however, is irrelevant to the praxeological fact that we choose means to achieve the end of getting to the other side, rightly or wrongly, given hind-sight.

  Economics assumes there are psychological factors motivating the choice of ends and cost/benefit tradeoffs, but economics really has not much to say about or concern for these choices besides assuming them. Choice of ends and the fact of cost trade-offs are considered a given and the psychological reasons behind them are outside the scope of economics but seem well within the scope of psychology.

  I don't mean that an economist, as an individual will not be interested in psychology, but rather that strictly as an economist, he will not be.

  At least, this is what I’m thinking. I could be wrong. Let me know if you think so.

  Published: June 9, 2006 11:42 AM

• M E Hoffer

  P.E.,

  I think that psychology, and many other of "Liberal Arts" fields, serve to additionally inform, and make better, the Economist.

  The Financial Analyst, on the other hand, corcerned as he is with static numbers and dreaded "equals" signs, would, I would think, have much less use for insights into human behavior, dare I say: Human Action.

  To me, there is a grand gulf separating real Economists, von Mises, and Hayek, are but two, and the many great pretenders, masquerading today, in "economics" garb-- that are little more than Excel jockeys with an unwholesome overaffinity for Edwin Land's invention.

  To strip from Economics, proper fields of inquiry, such as Psychology, is to hamstring, not only our further self-knowledge, but also our deeper /understanding of Man's interaction with the worlds around him/--isn't this the, writ large, definition of Economics?

  To truncate the field of purview, of Economics, gives us today's breed of economists, little better than Financial Analysts or Actuaries, no?

  Published: June 9, 2006 12:53 PM

• Student

  Saul,

  "(1)The bottom line is, all decisions to act are based on perceived anticipated results, not on actual final perceived results. (2) And of course, the reason for the deviation between anticipated enjoyment before the action, and actual enjoyment after the action has been taken also, therefore, has no bearing on human action and economics."

  A) I never disputed (1). The point is that if people can't tell how happy they will be from a choice, then assuming they do in our choice models (like Austrians and traditional neoclassical models do) will lead us to wrong predictions of how people behave.

  This is slightly different than the Bounded Rationality discussed in the other link (though it's related). It isn't only saying that people have limited mental faculties to assess all their options and therefore use simple rules to guide their decisions (since this can still be incorporated into a utility maximizing model).

  This is saying that that even if people had all the time and mind in the world to evaluate their options, they still wouldn't pick the bundle that maximizes their utility.

  
  B) (2) And how can this have no bearing on economics????????
  

  Published: June 9, 2006 1:31 PM

• Paul Edwards

  Student,

  If you do not dispute this: “(1)The bottom line is, all decisions to act are based on perceived anticipated results, not on actual final perceived results." then you can only be a hair's width away from grasping my argument.

  I feel for your sentiment, but recognizing that people can choose what will turn out to be the sub-optimal end, doesn't alter the fact that at the point of deciding on their action, they thought this end was optimal. As we agree, human action is always the result of anticipated desired results. So we may be perpetually saying to ourselves "you idiot, why did you go after that goal, it was a mistake", but there will never ever be any action taken ever that is guided by that sentiment.

  It is always this: "x is definitely what i want to achieve the most... or, i think x is what i want to achieve the most... or, oh hell, x is what i am going to attempt to achieve and we'll find out if it is really what i wanted to achieve". Any way you slice it, it can only be expected results that directs action, always. All the ex post stuff is irrelevant in the decision making that directs action and therefore it is irrelevant in economics.

  I don't think i'm making the clearest argument, so let me conclude by responding to your statement:

  "This is saying that that even if people had all the time and mind in the world to evaluate their options, they still wouldn't pick the bundle that maximizes their utility."

  which is very very possibly true. But let me modify the statement slightly to show my point:

  "This is saying that that even if people had VERY LITTLE time and mind in the world to evaluate their options, they still would always pick the bundle that THEY EXPECT maximizes their utility AT THE POINT THEY ACT."

  And it is what they expect in the future that directs action, and it is therefore this, and only this that the economist is interested in.
  

  Published: June 9, 2006 2:38 PM

• Student

  Paul,

  "This is saying that that even if people had VERY LITTLE time and mind in the world to evaluate their options, they still would always pick the bundle that THEY EXPECT maximizes their utility AT THE POINT THEY ACT."

  Then on that point we have always agreed.

  But this maybe where we differ:

  "And it is what they expect in the future that directs action, and it is therefore this, and only this that the economist is interested in."

  Why is that the only area the economist is interested in? This approach actually LIMTIS our abiility to understand people. So why adopt it?

  Published: June 9, 2006 2:47 PM

• Paul Edwards

  Student,

  “Why is that the only area the economist is interested in? This approach actually LIMTIS our abiility to understand people. So why adopt it?�

  Ok. Why adopt it, indeed. It hinges on this: Austrian economics is based on praxeology. I mean it is completely scientific: based completely on indisputable truths regarding human action. What an Austrian economist asserts to be true, is not just “likely�, it is necessarily true. For this to be the case, all the building blocks must be sound and necessarily true as well. So, starting with the necessary truth that humans act, we build on that what else must also be necessarily true. Which is: humans act based on anticipated results of the means used to achieve the desired end. This must be true. It is necessarily and indisputable true. It is also indisputably true that humans don’t and can’t act based on hind-sight. So as economists, the fact that hindsight can differ from foresight does not affect us. Hindsight just doesn’t play a role in human action and therefore in economics. Anything we say about hindsight from an economic perspective is really just anecdotal; it could be interesting, but it does not contribute to the necessary truths we need to work with in praxeology and economics.

  Also, I don’t mean to say that economists should hold psychology as unimportant or uninteresting. I personally think it is very cool. It’s just that they are two separate disciplines.
  

  Published: June 9, 2006 4:30 PM

• Paul Edwards

  M E,

  “I think that psychology, and many other of "Liberal Arts" fields, serve to additionally inform, and make better, the Economist.�

  I agree. It can’t hurt the Financial Analyst either. I also think economists should climb mountains, take up a physical sport and raise some kids. These other things round us out and are good for us I think. (I still claim action is directed exclusively by anticipation or results thought). :)
  

  Published: June 9, 2006 4:40 PM