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Predictably Irrational or Predictably Rational? : Richard B. McKenzie
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Modern behavioralists have been rewarded for their detective work with widely read, sometimes best-selling books, the most prominent of which are Richard Thaler's and Cass Sunstein's Nudge (2008) and Dan Ariely's Predictably Irrational (2008). One behavioral psychologist, Daniel Kahneman, was awarded a Nobel Prize, in part for his relentless debunking of the presumption of perfect or unbounded rationality that economists perpetuate.

 

See Behavioral Economics, by Richard Thaler and Sendhil Mullainathan in the Concise Encyclopedia of Economics for a summary of the subject. For several podcasts on rationality and behavioral economics, see Vernon Smith on Rationality in Economics, Richard Thaler on Libertarian Paternalism, and Sunstein on Worst-case Scenarios, hosted by Russ Roberts on EconTalk.

 

The decision-making biases identified by behavioralists include the availability bias, relativity bias, diagnosis bias, anchoring bias, herding bias, arousal bias, endowment bias, optimism bias, status quo bias or inertia bias, representativeness bias, relativity bias, loss-aversion bias, anchoring bias, and planning bias. Many of these decision-making biases are covered in the work of Dan Ariely (2008. Predictably Irrational: The Hidden Forces that Shape Our Decisions. New York: HarperCollins Publishers) and Richard Thaler and Cass Sunstein (2008. Nudge: Improving Decisions About Health, Wealth, and Happiness. New Haven, Conn.: Yale University Press).

 

For a brief summary of the behavioral approach and severe criticisms of the economic approach, see Ariely (2008, pp. xi-22). In his book that brings together the many anomalies in decision making he has uncovered, Richard Thaler recognizes that devising accurately descriptive models of human behavior is difficult because many theorists have a "strong allergic reaction to data." Moreover, economic models based on the rationality premise are "elegant with precise predictions," while behavioral work tends to be "messy, with much vaguer predictions." He then asks, "But,... would you rather be elegant and precisely wrong, or messy and vaguely right? (1992. The Winner's Curse: Paradoxes and Anomalies of Economic Life. New York, Free Press, p. 198).