Monday, November 29, 2010

Irony Alert: The "Anchoring and Adjustment" of Behavioral Economics

Another reposted post.

One of the books that I've read recently is Scott Plous' The Psychology of Judgment and Decision Making, available here. This book, although expensive, is a wonderfully concise discussion of the cognitive science, the primary foundation of behavioral economics.

One of the things that struck me was the book's discussion of the cognitive "bug" of anchoring and adjustment, which immediately followed its discussion of another cognitive "bug," the inability to accurately assess probability and risk, which it demonstrated through its discussion of the Monty Hall problem, which the books notes can be solved correctly by applying Bayes' Theorem.

If you look at Bayes' Theorem carefully, though, you can view it as little more than a mathematical expression of anchoring and adjustment. Apparently, when you express a bug mathematically, it becomes a feature.

Behavioral Economics as a whole is a study in anchoring and adjustment in that it persists in the fiction that "rational" behavior requires that humans maximize utility by applying precise mathematical formulas while considering only monetary wealth as utility. Behavioral economists do this because they start from the anchor of neoclassical economics, which they are merely trying to adjust to be more accurate. What they should be doing is scrapping the entire edifice as false.