5 Everyday Good Examples Of Behavioral Economics

Lakatos appears to solve the problem of how to appraise mainstream economic theory by arguing that what matters is empirical progress or retrogression rather than empirical success or failure. Lakatos’ views have thus been more attractive to economic methodologists than Popper’s. Blaug’s and Hutchison’s criticisms have sometimes been challenged on the grounds that economic theories cannot be tested, because of their ceteris paribus clauses and the many subsidiary assumptions required to derive testable implications. Mark Blaug and Terence Hutchison, who are the most prominent Popperian methodologists, criticize particular features of economics, and they both call for more testing and a more critical attitude. For example , Blaug praises Gary Becker for his refusal to explain differences in choices by differences in preferences, but criticizes him for failing to go on and test his theories severely. However, both Blaug and Hutchison understate the radicalism of Popper’s views and take his message to be little more than that scientists should be critical and concerned to test their theories. The view of models to which economists are most attracted is philosophically problematic, because it is apparently committed to the existence of fictional entities whose properties and causal propensities economists can investigate.

Imre Lakatos, who was for most of his philosophical career a follower of Popper, offers a generally Popperian solution to this problem. When theories face empirical difficulties, as they always do, one attempts to modify them. Scientifically acceptable (in Lakatos’ terminology “theoretically progressive”) modifications must always have some additional testable implications; otherwise they are purely ad hoc. If some of the new predictions are confirmed, then the modification is “empirically progressive, ” and one has reason to reject the unmodified theory and to employ the new theory, regardless of how unsuccessful in general either theory may be. Though progress may be hard to come by, Lakatos’ views do not have the same destructive implications as Popper’s.

Economy Examples

Given human free will, perhaps human behavior is intrinsically unpredictable and not subject to any laws. But there are, in fact, many regularities in human action, and given the enormous causal complexity characterizing some natural systems, the natural sciences must cope with many irregularities, too. Are there fundamental differences between the structure or concepts of theories and explanationsin the natural and social sciences?

Some of these issues were already mentioned in the discussion above of reasons versus causes. Explanations in terms of reasons have several features that distinguish them from explanations in terms of causes. Reasons purport tojustify the actions they explain, and indeed so called “external reasons” only justify action, without purporting to explain it. Reasons, unlike causes, must be intelligible to those for whom they are reasons. On grounds such as these, many philosophers have questioned whether explanations of human action can be causal explanations.

In experiments, whether carried out in a laboratory or in the field, experimenters interact causally with flesh and blood experimental subjects, and the outcome may contradict the economist’s predictions. In investigating a model, in contrast, the economist “interacts” with fictional entities, which are arguably nothing other than his or her own thoughts, and the logical implications of the axioms that define the model are never disappointed. This is not to say that the logical investigation of models never results in surprises. Humans are not logically omniscient, and discovering the implications of a set of axioms may be an arduous task. But it is a different task than carrying out an experiment in the laboratory or the field, and ontology of the “worlds” that economists allegedly “create” and then study is deeply puzzling. Although less faithful to economic practice, it is far more intelligible philosophically to regard models as predicates or as definitions of predicates. For example , when economists write down a model of a firm with a single output and just two inputs, they are defining a concept that they can use to describe actual firms.

Over the last two decades there has been a surge of experimentation in economics, and Friedman’s methodological views probably do not command the same near unanimity that they used to. But they are still enormously influential, and they still serve as a way of avoiding awkward questions concerning simplifications, idealizations, and abstraction in economics rather than responding to them. As critics have pointed out, Friedman refers to several different things as “assumptions” of a theory and means several different things by speaking of assumptions as “unrealistic”. In his terminology, the mistake economists make who criticize claims such as “firms attempt to maximize profits” lies in the attempt to test theories by the “realism” of their “assumptions” rather than by the accuracy of their predictions. He maintains that the realism of a theory’s assumptions is irrelevant to its predictive value. It does not matter whether the assumption that firms maximize profits is realistic. Theories should be appraised exclusively in terms of the accuracy of their predictions.

What matters is exclusively whether the theory of the firm makes correct and significant predictions. Since it is difficult and often impossible to carry out experiments and since the uncontrolled phenomena economists observe are difficult to interpret, it is hard to judge whether a particular theory is a good basis for predictions or not. A claim such as “firms attempt to maximize profits” will be “unrealistic” in the sense that it is not a true universal generalization. Although not in these terms, Friedman objects to criticisms of tendencies that in effect complain that they are merely tendencies, rather than universal laws. If his criticism stopped there, it would be sensible, although it would avoid the problems of understanding and appraising claims about tendencies. Owing to the importance of human choices, are social phenomena too irregular to be captured within a framework of laws and theories?