Behavioral Economics: At Odds with Freedom
Peter Ubel has written an informative and useful book, but not entirely for the reasons he thinks. He presents a very well written and easy-to-understand account of behavioral economics; in doing so, he illustrates, contrary to his intention, the dangers that this movement poses to our freedom. FULL ARTICLE
Comments (51)
Gil Guillory
I thought for sure that the JS Mill quote from On Liberty you were going to use was the famous last line of the essay:
The worth of a State, in the long run, is the worth of the individuals composing it; and a State which postpones the interests of their mental expansion and elevation, to a little more of administrative skill or that semblance of it which practice gives, in the details of business; a State, which dwarfs its men, in order that they may be more docile instruments in its hands even for beneficial purposes, will find that with small men no great thing can really be accomplished; and that the perfection of machinery to which it has sacrificed everything, will in the end avail it nothing, for want of the vital power which, in order that the machine might work more smoothly, it has preferred to banish.
Published: February 12, 2009 8:49 AM
Bruce Koerber
To speak of or write about the free market without being grounded in classical liberalism is intellectually dishonest and morally void.
Such is the blight of Peter Ubel.
Published: February 12, 2009 9:03 AM
lor glazer
Since inflation is really about inflating the money supply rather than the effect of higher prices, wouldn't it be correct to say that we continue to experience inflation even when prices are somewhat deflated or in periods of deflation?
Published: February 12, 2009 9:10 AM
lor glazer
Since inflation is really about inflating the money supply rather than the effect of higher prices, wouldn't it be correct to say that we continue to experience inflation even when prices are somewhat deflated or in periods of deflation?
Published: February 12, 2009 9:14 AM
Enjoy Every Sandwich
I'm not aware of any serious advocates of the free market who argue that the market works because all humans employ perfect reasoning. Rather, all of the ones I've read so far argue the opposite: that the free market provides the best and quickest feedback to those who have made mistakes.
Advocates of the State pursue the will-o-the-wisp of prevention of bad choices. Pfah, jolly good luck with that!
Published: February 12, 2009 9:21 AM
Rob
Price inflation and monetary inflation should not be conflated.
Published: February 12, 2009 9:23 AM
lor glazer
Right, and therefore the reason why the Fed is hardly ever mentioned in connection with the current economic crisis.
Published: February 12, 2009 9:53 AM
Nate Y.
lor glazer,
It would be accurate to say that we can experience inflation (expansion of the supply of money/credit) and see falling prices at the same time (but as you know falling prices is not deflation). We just lived/are living through such a period.
Published: February 12, 2009 10:27 AM
Michael A. Clem
Good point E.E.S. Alternately, if we believe that people are irrational, as Ubel claims, then why should we trust government agents (politicians and bureaucrats) to be any less irrational than the rest of us, and not make irrational governmental policies?
Published: February 12, 2009 10:32 AM
Tim Kern
"For example, people tend to prefer getting an amount of money for certain to a chance of getting a larger amount."
Has anyone here watched the television "reality" show, Deal or No Deal? The contestants on the show consistently turn down the certain money that's offered, for a chance to win more. They are examples of why Dr. Ubel thinks that free choice should be eliminated by government.
The question may also in itself explain some of the resultant behavior: as people have less to lose, they take bigger risks. As the consequence of any particular risk's being expensive falls, the risk itself is costless.
That may be why today's Americans would rather sue than work; or why they would rather get a $5 benefit from Congress than earn $5 ($9 before taxes), even if the "free" money costs someone else $500. Having nothing to lose does not make people less-rational; it simply reduces the negative effects of classically-poor decision-making.
Morals and a conscience are thus necessary in an unlimited democracy (as we have de facto, if not de jure) -- without them, plunder is the entire game. Even those who wish not to play, must, to sustain their very existence. Total dependence on the State results from unbridled democracy. And total dependence is slavery to a capricious master.
Published: February 12, 2009 10:42 AM
JB
Interesting.
In their first example, you can clearly see why people rate the the conjunction as being more probable: They are confusing (or not separating the solution for) "probability" with "average". I did this myself upon reading it through the first time.
Example:
If x and y have a probability and prob x>y,
then prob of x and y occurring together is xy.
Which would result in prob x>y>xy
The third option has the word "AND" in it which implies addition. This results in the test taker using the definition of an average:
(x+y)/2
This would result in an incorrect conclusion in probability ordering...
x>[(x+y)/2]>y
The problem then is not in the irrationally of humans but the degree to which the they choose to apply the correct definition when prompted. Seems more like a communication thing, as your rewording of the questions clarifies nicely.
Published: February 12, 2009 10:49 AM
lor
Nate Y., good point.
Published: February 12, 2009 10:59 AM
fundamentalist
Ubel demonstrates his own irrationality in claiming that the state can direct people’s lives better than the individual. History has proven that to be absolutely false and yet Ubel irrationally clings to the idea. He is irrational because, as Bastiat wrote, Ubel ignores the long run. He sees only the immediate outcome of decisions, not the long run effects of state control on society.
And as usual, Ubel completely misses Adam Smith's main points in "Wealth of Nations." Smith demonstrated that the free market punishes bad behavior and rewards good behavior. The market does a better job than the state ever could because the state does not know what is best for everyone or how to achieve it. And it's irrational to assume only good intentions for bureaucrats.
Published: February 12, 2009 11:14 AM
Noah
JB:
I think the issue with the conjunction of boolean clauses can be more closely modeled by the common understanding of the conjunctive, which is "fuzzy or".
A mathematician regards the word 'and' as a conjunction in the boolean sense. In the vernacular, 'and' more closely resembles boolean or, but it's resolution allows for partial truth. So, in the vernacular, A AND B for A=true and B=false is "half true"--it has partially resolved truth (Is the statement A and B true? answer: kind of).
Published: February 12, 2009 11:26 AM
Inquisitor
I hope behavioral econ has little to do with the discredited philosophical/psychological doctrine of behaviorism. Why is it that he thinks an inability to rationally calculate at all times implies people are "irrational"? They're certainly "rational" when it comes to their own ends, whatever their failings when dealing with abstract logical formalisms. It seems he has some pet definition of "rationality". Scientistic nonsense at its worst. "Irrational" = I disagree with it.
Published: February 12, 2009 11:35 AM
Inquisitor
Noah, it's been a while since I've done logic, but IIRC the way logicians define "or" is typically exclusive, whereas in vernacular it is more a matter of "and/or". Is this what you're getting at?
Published: February 12, 2009 11:37 AM
Scott
I have never been able to get past the premise that because humans can not express Vulcan-like rationality 100% of the time, a central monopoly controlled by (a small subset of) humans (equally "flawed"), is required. It seems an argument for why some should control others needs to be put in place beforehand, regardless of psychological make-up - since the rulers and the ruled are the same species.
Published: February 12, 2009 11:39 AM
Willabus
I also used to think like Ubel until I read 'The Constitution of Liberty' by FA Hayek.
It is my fear that Keynesian economics will soon fail and will not be replaced with Austrian economics but with behavioral economics. It is the only thing the socialists have left.
Published: February 12, 2009 11:45 AM
Raja
Good article, although I wish you would have focused on the latter points. First, that the state is not an acting entity and is run by the very same irrational people Ubel wouldn't let use a fork for fear of stabbing their eyes out. And second, that the state is not a nanny, but a slave owner.
I agree with Ubel that people _are_ highly irrational and do not fully understand the consequences of their actions, even if they say they do. Thus your response to those arguments of his are not very convincing. Just think about it, for thousands of years people have willingly chosen, accepted, and submitted to God and Country. Not just that, they have fought and died for them. Really!?!
However, jumping from irrational action to state is a non sequitur. Challange him on that where you have something to stand on.
Published: February 12, 2009 11:52 AM
Willabus
I love Ubel's simple logic and reasoning..."people do not to what I think they should do so therefore they are irrational and we need a government to protect them from themselves"
His use of extreme cases such as smoking and cancer is also comical. Why not extend this argument to other potentially life threatening activities such as riding a bike, diving into a pool, or crossing the street. We should even extend it to breathing and life in general for the very fact that once you are born you will eventually die.
Published: February 12, 2009 11:54 AM
andrew
Does it dawn on Ubel that if people make irrational choices in the marketplace, they would also make irrational choices in choosing those who would steer them to make rational choices? Unless he doesn't want people to choose their "leaders."
P.S. I'd be willing to bet that agricultural policy allegedly designed to help people make rational choices in the food they eat (in addition to directing money to various types of food producers of course) is a major factor in the obesity rate.
Published: February 12, 2009 12:19 PM
Beth
Please do not judge all behavioral economists based on this idiot's book. We are not all crazy. As a behavioral economist (and an avid supporter of the free-market) I can tell you that Ubel got it all wrong. The whole point of behavioral economics (at least from my perspective) is to show that humans have vastly complicated utility functions. We care differently about losses and gains, the future may be more or less important than the present, some people gain utility by giving to others, some people get disutility by having more than others, sometimes it matters to us how certain an event is ... etc. More importantly behavioral economics demonstrates that not only is our utility dependent on a multitude of things it is constantly changing. My studies in behavioral economics have reinforced my belief that no-one can make me happier than I can make myself. My happiness is so complex that no government could ever hope to make decisions that are actually in my best interest regardless of their intentions. Moreover, since behavioral economics shows that people have vastly different utility functions, any policy that makes me better off will certainly make someone else worse off.
The last time I checked free-market economic theory was not based on the assumption that all people can correctly calculate probabilities. But rather that all people are out to maximize their own utility, however they might define that. Furthermore, so what if I act "irrationally"? If it makes me happy to be irrational, what gives anyone the right to tell me that I'm wrong? If you think about it, we typically define "rational" as utility maximizing, so by definition any action I take that increases my utility must be rational, regardless of whether I correctly assessed the probabilities associated with it!
Published: February 12, 2009 12:42 PM
Reason
Why not have those wonderful and publically spirited volunteers in the coming mandatory national service assist the obese into a new CDC program that provides counseling, medications and deep-brain microchips that stimulate rational consumption? What a great way to increase employment, advance science and create a more humane society.
Published: February 12, 2009 12:50 PM
pbergn
Great article!
Nice exposé of one of the Communists' main propaganda tools in their arsenal - psychology, that is irrationality of human behavior as a case for Chomsky's cage...
Often reminds me of Isaac Asimov's famous "I, Robot", where the "superior" intelligence, in our case - the Commies, thinks that it must protect humanity from itself - from its irrationality...
So, sad... I am so saddened by the fact that there are fewer and fewer freedoms left to us...
Published: February 12, 2009 12:54 PM
Inquisitor
Beth I don't think Gordon means to say all behavioral economists are as flawed as Ubel is. Austrians would agree with everything you said as basic facts about humans and the character of their preferences.
Published: February 12, 2009 12:59 PM
Inquisitor
Could you point to any good primers on behavioural econ BTW Beth? I'm looking to write a paper on it and how it relates to Austrian econ, i.e. how the latter expresses these findings in its own theorems albeit through different methodological postulates.
Published: February 12, 2009 1:03 PM
Based on Red Herrings
My comment is similar to that of some other respondents. That is the assumption of Rationality. Mises defined this differently. To Mises Freedome and Free Markets are superior IF people act with a purpose. This is far from their definition of rational.
The other issue mentioned in the article is that even if people are completely hosed up in their behavior, government is inevitably even more hosed up and even more irrational in its behavior.
Published: February 12, 2009 1:04 PM
Robert A. Meyer
Peter A. Ubel doesn’t seem to realize that government planners and bureaucrats are people— and are prone to think and act in irrational, self-defeating ways. He possesses the ludicrous idea that these people are omnipotent beings who always act impeccably in their actions.
Not only is his anti-free market “ideas” ridiculous, he fails to perceive reality correctly. After all the ‘proof is in the pudding.’ Our beloved political and financial leaders have used government interventionism to practically destroy our economic system and the American Way of Life.
Also, he appears to believe that emotions have primacy over logic and reason. I guess if enough people object to the restrictions the laws of physic places on them because it makes them feel bad—we have to create a new science of physics—one that accounts for their irrationality.
Published: February 12, 2009 1:17 PM
Inquisitor
Based on Red Herrings, yes exactly. Austrians do not conceive of rationality in the way neoclassicals do, nor do they base their theorems on the same assumptions regarding it. I'm not sure what Ubel has to say is even a good criticism of neoclassicism, but it has even less force when applied to Austrianism.
Published: February 12, 2009 1:24 PM
Kurmudjin
The Declaration and our Founders were not concerned about govt promoting our health, longevity or welfare. They were especially not interested in having authorities tell us what is rational and in our best interests. They were concerned about freedom in the individual's "pursuit of happiness."
Happiness has little to do with rationality. This is where Ubel's arguments about rationality entirely miss the point of free markets and liberty.
If it makes one happy to gamble one's fortunes, climb dangerous mountains, consume harmful substances, or drive race cars, then arguments about rationality guiding our decisions are absurd. We are free to be self-destructive, because nobody else can judge for us what will make us most happy.
Published: February 12, 2009 1:25 PM
Brian Shelley
It is likely that the author is projecting his statistical modeling of the situation in place of the non-math decision making techniques employed by the survey takers. His knowledge of statistics biases him to believe that other people solve the problem the same way he would.
Use this scenario:
An old man walks down the street in a dirty and tattered tuxedo.
A. He's rich
B. He's a compulsive money hoarder
C. He's rich and a compulsive money hoarder
A and B individually seem to contradict the evidence, but the combination does not.
Published: February 12, 2009 1:44 PM
RisingTide
HUMANS are not rational decisionmakers.
End of Message.
Published: February 12, 2009 1:52 PM
David Spellman
The flaw in the Bank Teller question has to do with how people interpret the choices they are given. When people are asked the probabilities of Linda being only a bank teller or being a bank teller and a feminist, they answer a different question than what is posed.
What they answer is "What is the probability that Linda is a bank teller but not a feminist?" In their minds, they have concluded that this is not likely because they believe, given the background, that she would not just be a bank teller so they rate the probability low.
When asked about whether Linda is a bank teller and a feminist, they consider that the probability that she is a feminist very high and consequently rate this option much higher simply because it conforms to what they expect should be the case. In effect, it fulfills more of the conditions they consider should be true for the statement to be true.
In effect they are saying that the odds of being a bank teller and a feminist are much higher than only be a bank teller and treating it as an either/or proposition. This is not logical based upon the questions actually asked, but the study did not take account of the mental transformation being performed. If we consider that people are really answering a question about what is most likely to be the most complete fulfillment of their expectations about Linda, the answers do in fact make logical sense.
What this demonstrates is that surveys and studies can be defective by not correctly understanding how questions will be interpreted. It does not demonstrate that people are irrational.
Published: February 12, 2009 3:13 PM
Mark
""In 1991, only four states in the United States had obesity rates of 15 percent or higher; by 2001 some thirty-seven states did" (p. 10). Surely the technology behind easy-to-prepare food was well in place in 1991; modern methods of food preparation did not spring up only in the last twenty years."
According to wikipedia:
"By 1986, roughly 25% of households in the U.S. owned a microwave, up from only about 1% in 1971"
Maybe Ubel is right, and microwave ovens created the obesity epidemic.
Published: February 12, 2009 3:18 PM
Brent Railey
Robert Meyer had this to say:
I searched the comments before posting just to make sure that I didn't parrot what people have already said. All I can say is, "Amen!" Mises had this to say in Planning for Freedom:
I want to add one caveat to this: When people make poor decisions for themselves--even in the examples above such as smoking and eating--the sphere of damage is usually small and limited to the individual and his or her friends and family. When paternal governments act with irrationality and emotion (which they often do, i.e. the "Stimulus Package"), the scope of fallout is much more extended and the harm could potentially result upon all of its consitituents. Hence, Ubel makes a stronger case against government paternalism than for it.
I'd rather screw up my own life and take the responsibility for it than have someone screw my life up for me.
Published: February 12, 2009 4:32 PM
Robert A. Meyer
Brent Railey
It amazes me that many individuals eagerly take advice from or slavishly depend on people who are even more screwed up than they are. Talk about relinquishing self-responsibility. No wonder they fall for the fallacies of socialism and big government interventionism.
.
Published: February 12, 2009 5:14 PM
Dmitry Chernikov
One of the clearly "irrational" things people do is act on the basis of bad ideologies. But bad ideologies create bad governments. Are those bad governments supposed to set the people's ideology straight so that they could... uh, let's see... turn into... good governments? I am not sure that's how it works.
Enjoy Every Sandwich, that's a wonderful argument: when was the last time you saw a government agency go out of business?
Published: February 12, 2009 5:15 PM
Marc Sheffner
"Even if one did have a philosophy that justified considerable state action, a further problem would arise — one that Ubel also ignores. Why should we think that existing states would act rationally to carry out the dictates of that philosophy? Would not holders of state power be subject to exactly the errors of rationality that Ubel complains about in participants in the free market?"
Bing! Nailed.
The book's real agenda is slavery, and it needs to be shown for what it is.
Published: February 12, 2009 7:01 PM
newson
i agree with beth. just because people don't act like robots faced with outcomes of different probabilities doesn't make them irrational.
my drive to the beach is far more dangerous statistically than my swim out to the buoy. i should be more scared of the car than the white pointer, but i judge the disutility of dying behind the wheel to be less than the disutility of being gobbled up by jaws, regardless of their respective likelihoods.
i think behavioural economics has much to tell us about crowd psychology, and particularly how this applies to markets. why do markets fall faster than they rise? why is fear a stronger emotion than greed (at least in speculative markets)?
i don't see any problem for austrian economics in behavioural economics as presented correctly by beth.
Published: February 12, 2009 8:00 PM
Inquisitor
Or conversely, any problem for behavioural economics in Austrian econ. ;P
Published: February 12, 2009 9:44 PM
Abhilash Nambiar
Looks to me that David Gordon is mistaken in his refutation of Peter A. Ubel. Ubels survey (assuming it was done correctly) with the Linda example only shows that most people are less well versed in probability theory. It does not imply therefore that they are rational or irrational. David Gprdon assumes that being rational means that one knows probability theory. Thus he tries to make excuses for the results. You don't need to know probability thoery to be rational. In fact you do not even need to have a basic understanding of it. So what does it mean to be rational?
Being rational means being guided by reason. That is all. Here I can quote Mises.
So reasonable actions are rational. Reasonable to whom? becomes the next question. Reasonable to David Gordon or Peter Ubel or me? Actually no. That is purely incidental. Rational actions are actions reasonable to the person who is acting. Again here is Mises quoting.
From the point of view of the people taking the survey, their action is perfectly reasonable towards the end they sought, which is to finish the survey correctly. People can only be reasonable about what they know. Their knowledge of probability is limited as a component of action, so its role is limited. That does not mean they are not rational. It means they don't know probability theory that is all. They may want to learn probability theory of course. It depends on the importance they place on it on their subjective scale of values. They may want this knowledge to impact reasons for their future actions.
So now I ask myself why does David Gordon and Peter Ubel think it is irrational to not know probability theory. Because in their scale of values knowing probability theory is indeed a necessary for acting rationally. These men share a lot in common despite their disagreements.
They share the notion that some knowledge of probability is necessary to act in a way they would consider correct. Again I can quote Mises.
Here is another action that Ubel considers is not correct. People making choices that result in obesity. Eating habits that shorten their lives. For the record I would consider it not correct as well. Yet those are not irrational actions. People are guiding themselves by reasons that they can consider and their actions reflect their value scale.
So Ubel may claim this situation does not encourage virtuous actions and Gordon agrees. He only disagrees that the government is not the way to achieve it. My point is completely different. Libertarian ethics are value neutral in the sense that libertarian ethics is indifferent to the value scales of different people.
Virtue is a subjective concept, highly dependent on individual value scales. Most of us have ideas about virtue that overlap. Yet that does not change the essentially subjective nature of virtue.
What Ubel is trying to do, is what all people are trying to do these days. Impose their subjective notions of morality on others. It is just easier to do when your opinion meshes with that of the majority.
Published: February 12, 2009 11:30 PM
newson
to inquistor:
touche!
Published: February 13, 2009 2:13 AM
Beth
Inquisitor: A good place to start would be "Advances in Behavioral Economics" eds: Colin Camerer, George Lowenstein, and Matthew Rabin. It is a little dated but it gives an excellent overview of the topics typically covered in Behavioral Economics. It also has a nice combination of theory, field, and experimental papers so you get a little bit of everything.
I love the idea of applying Austrian theory in behavioral settings and using behavioral findings to inform Austrian theory. I think the two would play very nicely together. Now that you've gotten me thinking about this I'm wondering if there's been any experimental work done using Austrian theory as the basis for the design. If you can think of any, please let me know.
Published: February 13, 2009 11:27 AM
Matt Van Holdstean
Ubel is completely correct that the free market has caused cheap food. Cursed free markets and voluntary exchange for providing cheap food for poor people.
Published: February 14, 2009 3:35 AM
Matt van Holdstean
Another thing people should realize when make gambling bets people should always remember marginal utility. Yes winning 50 dollars will make you happy, though winning 50,000 won't make you 1000 times happier, and winning 500,000 wont make you 10 times happier, maybe only 5 times as happy. Those first few extra dollars are most important, so obviously people would seem risk averse when gambling, well unless you're stupid, and you gamble a lot. In which case you'll be broke, and can't really affect the market nearly as much as a smart rich individual.
Also I'm surprised Ubel didn't say people who play the lottery are a perfect example of irrational people, highly prevalent in the market.
Published: February 14, 2009 3:44 AM
newson
mvh says:
"Also I'm surprised Ubel didn't say people who play the lottery are a perfect example of irrational people, highly prevalent in the market."
irrational? says who, you? winning $ 500 000 may be a life-changing event for a poor person, winning $50 000 may not be, winning $50 is probably not. the utility of the chance of winning a fortune outweighs mere probabilistic considerations for lottery punters.
ubel is wrong.
Published: February 14, 2009 5:57 AM
D. Saul Weiner
"If it makes one happy to gamble one's fortunes, climb dangerous mountains, consume harmful substances, or drive race cars, then arguments about rationality guiding our decisions are absurd. We are free to be self-destructive, because nobody else can judge for us what will make us most happy."
Good point.
Also, isn't part of life making mistakes and having the opportunity to learn from them and to improve ourselves? If Ubel is trying to short-circuit this process, I am afraid that he misunderstands the nature of what it means to be a human being.
Has Ubel given any thought to how government interference in the free market (e.g. its indirect promotion of HCFS) has contributed to obesity? To ask the question is to answer it.
Published: February 14, 2009 6:31 PM
Franklin
How many times must we trot out Jefferson's famous quote to manifest the statist's logical fallacy? Sadly it won't be the last time....
“Sometimes it is said that man cannot be trusted with the government of himself. Can he, then, be trusted with the government of others? Or have we found angels in the form of kings to govern him? Let history answer this question.”
Published: February 14, 2009 10:26 PM
K Ackermann
Anything that uses generalizations of human cognition and reasoning is a failure. We don't work that way.
Let's try something:
Way in the future, man has created a robot with exceptional cognitive skills. This robot easily passed Turing's test for machine intelligence, and then some.
One day, the robot picks up a bat and clubbed a dog to death. The dog was not threatening the robot, and all the internal working of the robot seemed in order.
When they asked the robot why it did such a terrible, senseless thing and is it sorry that it did it, the robot said, "I just felt like doing it, and no; I'm not sorry. To tell you the truth, I feel oddly sated."
Would you classify the robot as rational? Was it's action against the dog reasonable?
What about when a hunter kills a deer?
Published: February 17, 2009 7:48 AM
Darian Lance Smith
Allow businesses a tax credit for every dollar distributed to employees, up to 20% of net profits.
This is the answer to the economic crisis world-wide.
It dovetails the left and right.
It quickly raises household income, and is business friendly.
Join the profitsharing uprising.
Published: February 17, 2009 3:47 PM
chuckv
Could the fact that I'm reading Mises.org instead of working on my paper that's due tomorrow be proof of his reasoning?
Published: February 17, 2009 8:52 PM