Reading Fast and Slow
For behavioral economists, however, freedom has a cost, which is born by individuals who make bad choices, and by a society that feels obligated to help them. The decision of whether or not to protect individuals against their mistakes therefore presents a dilemma for behavioral economists. The economists of the Chicago school do not face that problem, because rational agents do not make mistakes. For adherents of this school, freedom is free of charge.
Thinking Fast and Slow page 412 by Daniel Kahneman.
I like this book. In fact, I think it would make a great supplementary text for an experimental economics course. Kahneman explains carefully and exhaustively why human beings should think carefully about the process of making decisions. He argues that human beings can be quite irrational and this material is good to know especially if you want to make good decisions.
However, I do have a couple of quibbles:
1) The book is very long and I got really tired of reading over and over again why people make the wrong decision between two choices. The examples made me feel like I was at the optometrist. “Is this clearer or is this clearer?” After a while you just don’t care anymore.
2) He goes on a bit of a rant against economists (note that economists are quite willing to give a psychologist a Nobel Prize in economics it they think the work is worthy) and the assumption of rational agents. We understand the problem of this assumption BUT and this is a big but, rational agent models are still the best way to make initial predictions about market behaviour. What doesn’t work at the individual level seems to sort itself out at the market level.
3) Much of his policy implications just reinforce the economic idea that incentives matter. For example, an opt out system for savings will generate more savings in total because people will just have the money taken from their pay cheque without any effort. To the economist, the act of opting in is a transaction cost and the results make perfect sense. If it takes effort to start a savings program then less savings will occur. This doesn’t imply that the person is irrational.
Quibbles aside, this is a good read.
Tags: Behavioral economics, Evie Adomait, experimental economics, Kahneman