Quick thought …

Strict neo-classical economists need to realise that there ARE systematic deviations from tightly defined rationality and as economists we should try to understand these deviations (although preferably deviations can still be incorporated into a more general version of our framework).

Behavioural economists should realise that these deviations are far less common than they believe, and even if they do exist they aren’t necessarily policy relevant.

Example for both sides, the conjunction fallacy.

10 replies
  1. Matt Nolan
    Matt Nolan says:


    If I don’t stereotype things how am I supposed to make wild general statements about what they should do.

    I was just sitting around reading things when I noticed there were two extreme responses to the above paper being thrown around:

    1) Behavioural economics is stupid,
    2) Neo-classical economics is stupid.

    I thought if they could attack stereotypes then the best thing for me to do would be to attack the stereotypes back simultaneously.

    Personally I think that there is only one discipline here, choice theory. Instead of cleanly recognising this we have individuals are just using these stereotypes to cloak their own value judgments regarding choice. I hoped that by attacking both sides I could convince myself of this – and I did.

  2. goonix
    goonix says:

    If I was interpreting rauparaha’s comment I would say he was criticising the extreme positions taken by those on either side (i.e. a whopping generalisation that everyone is rational or everyone is not rational).

    I could be wrong however!

  3. Matt Nolan
    Matt Nolan says:


    Definitely, but he was also inherently criticising me propogating those extreme positions – as I might be implying that they have more relevance then they deserve. As a result, I felt I should explain why I did that.

    I avoided putting forward the main reason why – which was that I had no time to do a substantive post, but wanted to hit something down to put down my “feelings” associated with recent discussions on behaviour economics.

  4. Matt Nolan
    Matt Nolan says:


    Well neither side IS an example of the conjunction fallacy – but in that post there are lesson for adherents of either extreme position.

    The conjunction fallacy does exist – something that should hit the strictest adherents of traditional neo-classical logic.

    But the private institutional setting and elements of standard decision making account for a lot of what goes on when the fallacy is observed. Namely, once there is actually a cost to making a decision our agents become closer to the “standard rational” view. This implies that any policy based on a strict belief that behavioural errors are being made would tend to overestimate the degree of error – and as a result will “over-regulate”.

    As a result, the conjunction fallacy provides us with a case which illustrates that the most extreme versions of the neo-classical economist and the behavioural economist are inappropriate. And as a result, it shows us that it is appropriate to try and keep both sides in mind, and find a suitable middle ground.

Comments are closed.