New York: Behavioral economics, it seems, might just have a bias problem of its own.
Once dismissed as little more than psychobabble, the discipline, which marries classical economics with psychology, has won widespread acclaim over the past decade. It’s left an indelible mark on business, finance and policy making by explaining all the mind-bending ways people, try as they might, don’t act rationally. Along with the Nobel Prizes, it’s become a bona fide cultural phenomenon. Best sellers like Daniel Kahneman’s “Thinking, Fast and Slow,” countless TED talks and even a cameo turn by one of its founders in the blockbuster movie “The Big Short.”
Yet for a small, but vocal group of skeptics, the field has quickly become a victim of its own astounding success. Call it the “bias bias.”
Drawing on the work of longtime critic Gerd Gigerenzer, an expert in psychology at the Max Planck Institute for Human Development, they point to the tendency of those who have embraced its ideas to see biases everywhere — even when there are none. Not only do they bemoan the cottage industry of pseudoscience that’s cropped up around behavioral economics, but they also see some deep, fundamental flaws with its approach.
Non-specialists appropriating the language of behavioral economics is “a little like a poor man’s way of saying, ‘Hey, I’m smart,’” said Emanuel Derman, a professor of financial engineering at Columbia University. “The public loves it, but I don’t think it’s worth very much.”
While examples like the hot-hand fallacy in sports and the Dunning-Kruger effect (where people who don’t know a lot about something literally don’t know that they don’t know) have helped change the way we think we understand human behavior, it’s not hard to see how things could have gotten out of hand.
A Wikipedia entry for cognitive biases currently lists nearly 200 entries. They range from the actor-observer bias — attributing other people’s actions to their personalities while justifying your own as being dependent upon the situation in which you find yourself — to the zero-sum bias, where situations are incorrectly perceived to be like, you guessed it, a zero-sum game in which the winner takes all, to even the IKEA effect, where people place disproportionately high values on things they partially assemble themselves.
Are they all legit? Gigerenzer, who has made himself into something of a bête noire among behavioral economists over the past couple decades, has his doubts. In his 2018 paper, he concluded that most studies on cognitive biases are flawed. They either rely on small sample sizes, misinterpret individual errors for systematic biases or underestimate how people absorb information based on how a fact or question is framed.
One oft-cited bias is the phenomenon of overconfidence. To the behavioral economist, business and finance are rife with examples of irrational decisions based on big heads and outsize egos. But what appears as a bias can often be perfectly deliberate and rational, Gigerenzer says.
For example, take an analyst who sells exchange rate or stock market forecasts. His predictions will invariably be mostly wrong — because if they were right most of the time, he wouldn’t have to work for a living. So the analyst, and others like him, tend to exude confidence because “few would buy their advice” if they were more honest about the accuracy of their calls.
Or how most people confidently believe Rome is south of New York, based on temperatures alone, even when it’s actually located further north. In isolation, it might seem like yet another example of overconfidence. But ask the same question comparing all big cities randomly rather than using a hand-picked pair and the bias disappears, according to Gigerenzer.
“Behavioral economics claims overconfidence is a robust phenomenon,” he said. “Our research has shown that there’s nothing robust about it. There’s a seduction to misrepresent reasonable behavior for biases.”
Granted, Gigerenzer’s beef with behavioral economics, and its most influential proponents, like Kahneman, Amos Tversky and Richard H. Thaler, isn’t new. If you google “behavioral economics criticism,” it doesn’t take long before Gigerenzer’s name comes up, again and again. And he hasn’t done himself any favors with his combative style. Even among his defenders, there’s a sense that criticizing the discipline has become a bit of a hobbyhorse for Gigerenzer, and a slightly tiresome one at that.
Kahneman, who was awarded the Nobel Prize in 2002, and Tversky long ago took issue with what they say is Gigerenzer’s willful misinterpretation of their positions and ideas, which misleads readers. Others, like Carnegie Mellon’s Alex Imas, say the problem is that Gigerenzer often uses oversimplified arguments to dismiss theories that he doesn’t actually take head-on. For example, Gigerenzer once asserted behavioral economists had replaced Homo economicus with Homer Simpson as their model for human behavior.
For his part, Thaler, a Nobel laureate in his own right who runs an asset management firm when he isn’t teaching behavioral science at the University of Chicago, suggested his own heuristic: ignore Gigerenzer.
Thanks @alexoimas for saving me the trouble. GG has been arguing with strawman versions of K&T for decades. Their *premise* is that heuristics work most of the time, but lead to systematic errors, which means that rational models make forecast errors. My heuristic: ignore him. https://t.co/J8edX2YFNP
— Richard H Thaler (@R_Thaler) July 22, 2019
Nevertheless, as behavioral economics becomes increasingly ubiquitous in everyday life, even proponents have started to acknowledge the potential pitfalls.
In a recent episode of Ted Seides’ “Capital Allocators” podcast, Albert Bridge Capital’s Drew Dickson talked about how his team integrates behavioral economics into its investing approach. After listing some of the biases they watch out for, Dickson named the “bias bias” as his new favorite.
“People are now talking about behavioral finance so much, and a lot of them are relatively new to it, they almost want to start looking as if there’s definitely going to be a bias here,” said Dickson, who declined to comment for this story. “You’re biased to find a bias.”
Gigerenzer isn’t the only one looking to poke holes in behavioral economics.
Just this month, Nassim Nicholas Taleb, of “The Black Swan” fame, retweeted an earlier post highlighting an unfinished draft of his own takedown. Titled “Nudge Sinister, How Behavioral Economics is Dangerous Verbalism,” it summarizes 12 different errors that lead economists to produce or identify biases that aren’t really biases.
HIGHLIGHTS OF 2019 (One more) https://t.co/LPODiFr4gu
— Nassim Nicholas Taleb (@nntaleb) January 6, 2020
Ole Peters, a fellow at the London Mathematical Laboratory, has turned his attention to what he believes is an even bigger, more fundamental issue.
To oversimplify, he argues the entire field of economics is flawed because it doesn’t correctly account for the problem of time, in what he’s termed as the ergodicity problem. (If you want to get deep into the weeds, you can read his academic paper, published last month, here.) That results in discrepancies between how we would expect a rational actor to react to potential gains and losses, and our actual intuitions, a key consideration in the development of Kahneman and Tversky’s prospect theory.
The upshot, according to Peters, is that in coming with “psychological arguments about human behavior” to patch up the discrepancy, behavioral economics mistakes a symptom of the problem for the problem itself.
“Economics is firmly stuck in the wrong conceptual space,” he wrote.
Why news media is in crisis & How you can fix it
You are reading this because you value good, intelligent and objective journalism. We thank you for your time and your trust.
You also know that the news media is facing an unprecedented crisis. It is likely that you are also hearing of the brutal layoffs and pay-cuts hitting the industry. There are many reasons why the media’s economics is broken. But a big one is that good people are not yet paying enough for good journalism.
We have a newsroom filled with talented young reporters. We also have the country’s most robust editing and fact-checking team, finest news photographers and video professionals. We are building India’s most ambitious and energetic news platform. And have just turned three.
At ThePrint, we invest in quality journalists. We pay them fairly. As you may have noticed, we do not flinch from spending whatever it takes to make sure our reporters reach where the story is.
This comes with a sizable cost. For us to continue bringing quality journalism, we need readers like you to pay for it.
If you think we deserve your support, do join us in this endeavour to strengthen fair, free, courageous and questioning journalism. Please click on the link below. Your support will define ThePrint’s future.