Knowing and Making Mon, 25 Nov 2019 18:00:36 GMT language
- The economics of what is in people’s minds
- The welfare or happiness they get from their state of mind
- The use of survey data to find out what their state of mind is
- Fictional or symbolic utility – the pleasure we gain from our beliefs (independently of their accuracy or correlation to reality)
- The structure of preferences – an understanding of cognition allows preferences to be endogenous to an economic model, rather than exogenously given
- The real economic effects of marketing – aside from simply providing information, marketing persuades people – that is, it changes their beliefs and preferences
And depending on the theories we develop, the field could provide insight into:
- Intertemporal tradeoffs, why they exist and how they are made
- Social transmission of beliefs and preferences
- Empathy for others and vicarious utility
- Continuing to build alternative theories of individual decision making (DM), to supplement or replace utility maximisation. Miles talks about “new theoretical tools for dealing with finite cognition” and I agree this needs to be a core part of the program. Examples include Gabaix’s sparse maximisation models, and my own work on prospection. Much of the work in judgement and decision making would fit into this area, but a lot of it is oriented towards explaining individual decisions and not amenable to theoretical use in economic models. Of course we should avoid the trap of making assumptions about DM for the sake of modelling convenience rather than accuracy. However, it is definitely possible to make simplifying choices that retain more realism than rational agent theory, and provide more modelling power than empirical psychology.
- Using these DM models to explore important phenomena that are observable and have economic consequences. The models will only be used if they are useful; I believe we can show their value by explaining things like advertising, the evolution of preferences, and the significance of media consumption in our lives.
- Working out how markets operate under the constraints of finite cognition. The classical microeconomic models are beautiful but rely on utility maximisation to work. Many writers have observed ways in which markets depart from these ideals – which often have political implications, from Hayek’s “Road to Serfdom” on the right to Shiller and Akerlof’s “Phishing for Phools” on the left.
- After this, we might eventually look for macroeconomic – or macrosocial – principles of how whole economies and societies work on cognitive economic foundations. It is likely to be some time before the theoretical foundations are ready to support that kind of work.
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