Economists Just Don't Get People
Most models are based on crazy assumptions, Mark Buchanan argues
By Kevin Spak, Newser User
Posted Dec 16, 2013 1:48 PM CST
This Nov. 29, 2013 file photo shows shoppers in Brea Mall during Black Friday shopping in Brea, Calif.   (AP Photo/Jae C. Hong, File)

(Newser) – The next time you hear an economist make a bold pronouncement, you should probably be a bit skeptical, because the entire field "is desperately in need of a paradigm shift," argues Mark Buchanan at Bloomberg. Why? Because most economic models are based on the idea that individuals make decisions rationally—which is to say, based "on the same unbiased, probabilistic view of the future." Which is basically crazy. "It’s like a physics teacher assuming that students already know by instinct the exact mathematical form of Einstein’s relativity theory."

Want evidence? In a recent study, economics students were asked to forecast outcomes in an economy governed by simple equations—without knowing those equations, and given that the students themselves could affect things. Their predictions were all over the map. "Include realistic behavior in your models, and you get a realistically complex economy that is very hard to predict and control." And that's what we desperately need, because "in such chaos lies economic reality." Click for Buchanan's full column.

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Showing 3 of 42 comments
Dec 16, 2013 9:16 PM CST
Marketing people know a thing or two about controlling behavior.
Dec 16, 2013 9:04 PM CST
Especially when it comes to human buying behavior there is little logic. The only thing you can count is the increase in sale of 40s and blunts as Obama expands the goverment handouts and kills the middle class.
Dec 16, 2013 7:46 PM CST
He's right. There is no logic to human behavior. For proof of that look at the story about the canccer patient who was asked to remove his hat in a restaurant.