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The Dismal Mind - Economics as a Pretension to Science - Part III

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4. Homo Economicus

The economic actor is assumed to be constantly engaged in the rational pursuit of self interest. This is not a realistic model - merely a (useful) approximation. People don't repeat their mistakes systematically (=rationality in economics) and they seek to optimize their preferences (altruism can be such a preference, as well).

Still, many people are non-rational or only nearly rational in certain situations. And the definition of "self-interest" as the pursuit of the fulfilment of preferences is a tautology.

V. Consumer Choices

How are consumer choices influenced by advertising and by pricing? No one seems to have a clear answer. Advertising is both the dissemination of information and a signal sent to consumers that a certain product is useful and qualitative (otherwise, why would a manufacturer invest in advertising it)? But experiments show that consumer choices are influenced by more than these elements (for instance, by actual visual exposure to advertising).

VI. Experimental Economics

People do not behave in accordance with the predictions of basic economic theories (such as the standard theory of utility and the theory of general equilibrium). They change their preferences mysteriously and irrationally ("preference reversals"). Moreover, their preferences (as evidenced by their choices and decisions in experimental settings) are incompatible with each other. Either economics is not testable (no experiment to rigorously and validly test it can be designed) - or something is very flawed with the intellectual pillars and models of economics.

VII. Time Inconsistencies

People tend to lose control of their actions or procrastinate because they place greater importance (greater "weight") on the present and the near future than on the far future. This makes them both irrational and unpredictable.

VIII. Positivism versus Pragmatism

Should economics be about the construction and testing of of models, which are consistent with basic assumptions? Or should it revolve around the mining of data for emerging patterns (=rules, "laws")? On the one hand, patterns based on a limited set of data are, by definition, inconclusive and temporary and, therefore, cannot serve as a basis for any "science". On the other hand, models based on assumptions are also temporary because they can (and are bound to) be replaced by new models with new (better?) assumptions.

One way around this apparent quagmire is to put human cognition (=psychology) at the heart of economics. Assuming that the human is immutable and knowable - it should be amenable to scientific treatment. "Prospect theory", "bounded rationality theories" and the study of "hindsight bias" and other cognitive deficiencies are the fruits of this approach.

IX. Econometrics

Humans and their world are a multi-dimensional, hyper-complex universe. Mathematics (statistics, computational mathematics, information theory, etc.) is ill equipped to deal with such problems. Econometric models are either weak and lack predictive powers or fall into the traps of logical fallacies (such as the "omitted variable bias" or "reverse causality").

About the Author

Sam Vaknin is the author of Malignant Self Love - Narcissism Revisited and After the Rain - How the West Lost the East. He is a columnist for Central Europe Review, United Press International (UPI) and eBookWeb and the editor of mental health and Central East Europe categories in The Open Directory, Suite101 and searcheurope.com.

Visit Sam's Web site at http://samvak.tripod.com

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