Wednesday, August 2, 2017

The unchallenged assumption of human agency in economics

One of the things I read in multiple places is that economics is different because its subject is human beings who can reflect on the findings of economics and change their behavior. And while I do think this is possible for some economic observables, I do not think it is inevitable for every economic observable. Part of the reason is that I do not think humans are "really thinking" about many of their economic choices. Additionally, there's actually some evidence that humans aren't really thinking about interest rates for example.

Despite the sometimes convoluted rationales one hears about investment decisions from co-workers, I am under the impression that many of those decisions are made for reasons not known to the decider.

This is one step beyond what I usually assume as a basis for the information equilibrium approach -- instead of the the rationales being inscrutable to the economic theorist, they are in addition inscrutable to the economic agent.

Today, Sean Carroll linked to a piece about a philosophical discussion about comprehension and consciousness, and the Daniel Dennett's ideas could form a philisophical basis for the even stronger assumption. The introduction to the debate states:
On comprehension, [Daniel] Dennett maintains that much animal and indeed human behaviour displays “competence without comprehension”, achieving ends without the subject’s understanding why. In a similar vein, he holds that human cultures can develop blindly, due to the natural selection of the “informational viruses” that Richard Dawkins has labelled “memes”, including some of the greatest products of human culture ... 
When we get down the the debate itself, Dennett says:
I am claiming – and it seems quite obvious to me, not in the least “peculiar” – that we must break our habit of assuming “thinking” whenever we see cleverness.

As Dennett points out, we are uncomfortable with this idea:
People are generally comfortable with the discovery that they have no direct knowledge “from the inside” of the properties of the blood-purifying events in their kidneys, or of the properties of the peripheral events in the eyeball and optic nerve that subserve vision, but the idea that this ignorance of internal properties of the relevant events in the brain carries “all the way up” is deeply counterintuitive. 
Of course it's not an absolute, but as Dennett says human ingenuity may have less of a role than we think:
Yes, some of the marvels of culture can be attributed to the genius of their inventors, but much less than is commonly imagined, and all of it rests on the foundations of good design built up over millennia by uncomprehending hosts of memes competing with each other for rehearsal time in brains ...
So when economists start with rational agents, or even agents that have "agency", we have to understand this is actually a philosophical assumption turned modeling assumption and not necessarily obvious.  And may in fact be behind some of the problems of economic theory.

If correct, this will probably be the hardest idea to convince people of ...


Update 7 August 2017

Thanks to Chris Dillow for linking to this post. You should read his ‒ he gives more practical reasons instead of "high-falutin’ grand theory".

One thing I did want to emphasize is that regardless of whether humans really are thinking about economic choices, it is effectively a model assumption to start your economic model with agents thinking about their choices. Like all assumptions, this may or may not be a good model choice. You can start modeling an ideal gas by first figuring out the quark states in atomic nuclei and then build up atoms and molecules, finally doing a vast simulation using individual atoms figuring out that the pressure is inversely proportional to the volume. An easier way is to start from simply the idea that an ideal gas is made of a lot of something.

The issue is that no one has yet built up an empirically accurate model of the macroeconomy starting from the idea that humans are thinking about their decisions (or from agents at all). For specific assumptions about how humans think, there are even theoretical results that show those assumptions have no consequences (the famous SMD theorem). And for microeconomics, it's actually not necessary for agents to think about their decisions to obtain some standard economic results (for example, there is Gary Becker's paper about "irrational" agents, or see here where I reproduced the results of John List's experiments using random agents).

It seems like the natural starting point to think about economics is human decisions ‒ and even our own experience, attempting to probe our own minds for insight. But maybe this is just a bias because we ourselves are humans. When dealing with animal ecosystems, biologists don't usually start from their intuition of what the animals are thinking. In fact, there exist examples where the animals are treated pretty much like molecules in a chemical reaction.

In fact, one of the best economic models treats humans as not fully thinking about their decisions (random utility discrete choice models). Maybe we should open up the field to a less human decision based, more pluralistic approach where the primary metric is empirical (external) validity ‒ not whether the model satisfies our biases about how an economic model should work.

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