Can Behavioral Economists Improve Economic Rationality?

Posted: 6 Jun 2018

See all articles by Dwight R. Lee

Dwight R. Lee

Southern Methodist University (SMU) - O’Neil Center for Global Markets and Freedom

J. R. Clark

The University of Tennessee at Chattanooga

Date Written: November 13, 2017

Abstract

Behavioral economists recognize that we are all subject to the cognitive biases they have observed and studied in laboratory experiments. Yet the leading behavioral economists exhibit far more interest in applying those biases to market decisions than to political decision-, and see irrational decisions making as another example of market failure which justifies correction by some form of government action. We treat this as a justification for comparing the distortions of cognitive biases on market decisions with the distortions of those biases on political decisions. We also make a distinction between the rationality of individual decisions and the collective rationality of those decisions, and question Thaler’s argument that people fail to learn much from the mistakes they make in markets. We conclude that behavioral economists would do more to increase economic rationality by making the case for eliminating government policies that are clearly economically irrational and destructive. Eliminating such policies would not necessarily increase the individual rationality of political or market decisions, but it would increase the collective rationality of both.

Keywords: Behavioral economics, Confirmation bias, Endowment effects, Loss aversion, Shortsightedness, Identifiably-victim effect, Underweighting opportunity costs

Suggested Citation

Lee, Dwight R. and Clark, Jeff R., Can Behavioral Economists Improve Economic Rationality? (November 13, 2017). Public Choice, Vol. 174, No. 1-2, 2017. Available at SSRN: https://ssrn.com/abstract=3182562

Dwight R. Lee

Southern Methodist University (SMU) - O’Neil Center for Global Markets and Freedom ( email )

United States

Jeff R. Clark (Contact Author)

The University of Tennessee at Chattanooga ( email )

Department of Economics
Suite 313 Fletcher Hall
Chattanooga, TN 37403-2598
United States

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