Comments on: Economics: A Question

By: Mike Champion

Mike Champion — Tue, 26 Feb 2008 14:08:55 +0000

I thought of this thread when I read this New Yorker piece by Elizabeth Kolbert on the systematic irrationality that behavioral economics is uncovering, and the implications.

By: Andre

Andre — Tue, 29 Jan 2008 06:14:57 +0000

von neumann and morgenstern focus on what i would imagine is the more specialized subject of decision theory. i was also going to mention the normative (also known as prescriptive) vs descriptive thingee. the subject does get more advanced than maximizing expected utility and there are plenty of models that try to account for more real word behaviors (i actually wrote my thesis on decision theoretic models that allowed for violations of transitivity). the fact of the matter is that it’s more fun to construct normative mathematically-based models that make some basic assumptions that inevitably won’t always be true. there’s no way you can construct a set of rules to model the behaviors of irrational agents, and without those assumptions, it’s basically an observational science, right? imagine if you were an economist, which would you rather do? contruct a sim-universe or gather data?

By: ac

ac — Mon, 28 Jan 2008 22:11:17 +0000

Along with people acting “irrationally” and messing up an economist’s models, sometimes even markets act “irrationally” and mess up investors’ models. Amazon.com: When Genius Failed: The Rise and Fall of Long-Term Capital Management is the only book I’ve read about it. It’s about how hedge funds have these super brains modeling out market behavior and not being able to react when things start to go wrong.

By: Mike Champion

Mike Champion — Mon, 28 Jan 2008 20:06:59 +0000

Nobel prize winner & non-economist Daniel Kahneman has had a huge impact in showing the limits of showing assuming rational, profit-maximizing behavior (and not just because of limited information). Dont’ know if these kinds of things get mentioned in Econ 101 classes covering classical economics.

By: arthegall

arthegall — Mon, 28 Jan 2008 19:27:20 +0000

Certainly the first couple of chapters of Von Neumann and Morgenstern should be required reading on the topic. (I don’t have my copy on hand, to say exactly how many chapters — but it’s in the very beginning of the book.) They have a few words to say about the ‘normative’ vs. ‘descriptive’ takes on utility, if I remember correctly.

This Keynes quote, from DeLong, is also probably relevant.

Also, a description of prices as they arise in an arbitrage-free system might be somewhat tangential. For instance.

But I am not an economist either, so: grain of salt.