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The Potentials and Limitations of Rational Choice Theory: An Interview with Gary Becker

Pre-published Online on February 21, 2012
Erasmus Journal for Philosophy and Economics,
Forthcoming, Volume X, Issue X,
XXXX, pp. XX-XX.
: Catherine Herfeld is currently a PhD candidate at the chair of economics and
philosophy at Witten/Herdecke University (Witten), and a fellow at the Max-Planck-
Institute for the History of Science (Berlin). Her thesis is on the history and
philosophical foundations of rational choice theory. At the time of this interview, she
was a visiting scholar at the Department of Philosophy of Columbia University (NY).
Contact email: <>
The potentials and limitations of rational
choice theory: an interview with Gary Becker
Witten/Herdecke University
Gary S. Becker (Pennsylvania, 1930) is a university professor at the
Departments of Economics, Sociology, and the Graduate School of
Business at the University of Chicago, Illinois. Becker earned his
undergraduate degree from Princeton University and was awarded a
PhD by the University of Chicago in 1955 for a thesis on the economics
of discrimination, under the supervision of Milton Friedman. After
teaching at Columbia University from 1957 to 1969, he returned to the
University of Chicago where he has been based ever since.
Becker’s work and research interests encompass a wide range of
topics, unified by what he calls The economic approach to human
behavior (Becker 1976). He considers this refined version of the
neoclassical theory of consumer behavior as a method that can
be applied to analyzing individual choices beyond the boundaries of
traditional economics domains, including discrimination, education
(human capital), crime, addiction, the family (marriage, divorce, fertility),
and altruism. Becker’s path-breaking work has been recognized with
numerous honors, including the John Bates Clark Medal (1967), and
the Presidential Medal of Freedom (2007). In 1992, he was awarded the
Nobel Memorial Prize in Economic Sciences “for having extended
the domain of microeconomic analysis to a wide range of human
behavior and interaction, including nonmarket behavior” (Nobel Prize
press release).
Professor Becker was interviewed by Catherine Herfeld at his office
on the Campus of the University of Chicago on December 8th, 2010.
The discussion ranged over a number of issues including the
consequences of the recent financial crisis for the economics profession,
the role of mathematics in economic modeling and the role of modeling
in economics, the significance of the rationality-principle, and the
development of Becker’s ‘economic approach’ and its distinctiveness
from behavioral economics.
CATHERINE HERFELD: Professor Becker, looking back on the recent
economic crisis and the failure of the majority of economists to
forecast what happened, do you think the economics profession faces
a crisis?
BECKER: No, I do not think so. I think that the profession will be
affected in the sense that people will be working on problems in order
to understand the financial crisis—and people are doing this already.
But forecasting major events like that is very hard to do in any field.
And I think to hold that as a standard of what one can do in a field is
not the right standard. It is true that specialists, maybe in fields such
as ‘asset pricing’ and ‘assets and banking’, should have seen that banks
had high ratios of assets to capital and that only a few people in the
profession forecasted that that might be a problem, some of them
maybe even only by accident. But I do not think that we can observe
a crisis in economics.
What we can indeed observe is much more a tension, particularly
in the macroeconomic literature, in trying to understand what actually
happened. Already before the crisis, there was a literature on
the financial sectors that was concerned to understand business cycles
by making use of the so-called real business cycle theories. Those
theories are on the defensive now. I think, as we go forward, theories
of business cycles will have to give much more attention to the financial
sector. In that sense the crisis has taught economists an important
lesson, but it will not radically change what most economists are doing.
Following the crisis, many economists and methodologists have
argued that more realistic behavioral underpinnings of economic
theory would have made forecasts more accurate. Do you think that
one of the things the recent crisis has shown us is that people just
do not behave rationally? Or did the crisis rather show exactly
the opposite—that people did in fact react to incentives and that the
consequences of introducing new financial instruments were just not
I think it is mainly the latter. There were incentives, both on the
borrower and on the lender side, that these subprime loans would be
made available at the lowest interest rates; and there was pressure
from the government to do so; and probably those involved did not
understand the financial instruments. Now, is it that we have to change
our theories radically with respect to their behavioral structure or even
switch to a new behavioral framework? There is very little evidence that
would support such a move.
There is a whole field of behavioral economics that I follow pretty
closely, and parts of it I have even contributed to. But did the behavioral
economists predict the crisis any better? When taking a look at the
literature, one does not find better results. The rational choice model
is an abstraction and as is the case with all abstractions and all theories
from whatever discipline, say physics, you abstract from some things
that sometimes may be important. And this is also true of the rational
choice model. In terms of understanding the crisis, I do not think that
more realistic behavioral assumptions would solve the problem. It has
always been difficult in rational choice models to adequately account for
the coordination of people’s expectations. To some extent, the crisis
involved the coordination of irrational expectations. This might be
something we should think about and improve.
With respect to how the crisis affects our models in terms of being
based on a more realistic assumption structure: what will occur is
that models become refined to help us understand what happened.
But I do not see a fundamental change in the models with respect to the
underlying structure of human behavior, nor do I see a need for such
a change.
So was the crisis more a source for a critique against the rational
expectations hypothesis, rather than towards the behavioral core of
economic theory, i.e., rational choice theory?
Well, to some extent it was a critique of that hypothesis. The
expectations turned out to be, to some extent, not rational; there is
no question about that. Price increases were for example expected
to continue. But the theory of rational expectations always said that
people make a forecast and could coordinate on a bad forecast.
That has always been part of the theory, however there is more
attention being paid to that phenomenon now.
In the post war period, mathematization was (and still is) considered a
prime virtue of economic theory, and important to improving the
scientific status of economics. Finance, especially, embraced highly
technical models that produced precise calculations and predictions.
However, it is claimed that it is exactly this extensive use of
mathematical models that ultimately weakens the scientific status
of the discipline; the failure of economists to predict the crisis being
taken as evidence. What role should mathematics play in economics?
And in which ways and to what extent can these mathematical
models inform us about the complexity of the social world and of the
Let me give you an example. The great depression was a far more
serious crisis than this financial crisis we are currently facing.
Economists made no use of mathematical models then. Did they predict
that crisis very well? No, they did not. Going back and analyzing this
failure is a good lesson to take. The economists back then did just
as badly as the economists do now in terms of predicting. So, I do not
think that the problem lies in the use of mathematics.
There is a lot of critique against mathematics in economics, from
non-economists, from Austrian economists and from other groups, and
I think it is misplaced. Mathematics can be a very useful servant; when
it becomes the master, we are not in a good situation. However, I do not
think it has become a master in economics. I think we made mistakes in
understanding how economies move forward, even in understanding
the pricing of derivatives. But one can make these mistakes, and plenty
of mistakes have been made, without using any mathematics.
Sociologists make a lot of mistakes without using mathematics. So I do
not think that the problem is the use of mathematics per se.
The discipline will continue to be heavily mathematical but hopefully
will learn from this crisis. I always say that mathematics is useful
but you have to have good economic content. If you do not have good
economic content then, whether you do it mathematically, verbally,
or with a graph, you are doing bad analysis. I am not one of the
most mathematical of the economists; a lot of people use much more
mathematics than I do. But I have never thought that the use of
mathematics is the problem. Only bad use of mathematics is a problem
and will continue to be a problem. If we did it all verbally, would that
improve our science? Economics was a verbal science until the 1940s
and I would say we are now doing much better than the economists
back then.
How do you think economics should be done?
The way I like to put it is that we have to have a dialogue between the
theory or model and the data. Theory informs us about what data to
look at and how to interpret the data. But data also informs the theory.
So if you have theoretical predictions that continue to turn out wrong,
you have to change the theory. As I said, the real business cycle theory
ignored the financial sector. This crisis showed us that the financial
sector is really important. Economists who are working in that area
are going to change that now. And that is how I think it should be.
A discipline where the theory is isolated from what is going on in
the world will become a sterile discipline. And a discipline that is only
looking empirically without any modeling will also become sterile.
I think the disciplines that are active, that are productive, are those that
have an active dialogue between the two aspects. That does not mean
that everybody has to be doing both, but I have always believed that the
ideal economist works with theory, looks at the data, gets a data
feedback on the theory and vice versa. Some people just work on
theoretical issues and that is fine. Some people just put data together in
a useful way, which is fine too. But the bulk of them should be looking
at this combination.
Coming to your own work, you had a major influence on 20th century
economics by introducing a broad range of human motives into
economic theory, something that could be considered as going into
the same direction as what is today known as behavioral economics.
Yet, unlike behavioral economists, you retained “an irrational passion
for dispassionate rationality”, as you once expressed it.
Why did
you decide to stick with the rationality-principle in explaining and
predicting human behavior?
I felt that the rationality-principle was a powerful tool that was useful
for explaining behavior. In all my work, even if it is purely theoretical,
I am looking at data, talking about observations, sometimes even
gathering data. For example, when I used a rational model of altruism
to look at the family, it seemed to help me to understand why parents
do support their kids and under which conditions they do so, to analyze
relations between spouses, and so on (e.g., Becker 1981). When I went to
crime, I thought it helped us to understand crime and deterrence and
Oral remark at a luncheon seminar at Tulane University in 1986 (Choi 1993, 19 fn.).
the effects of education (e.g., Becker 1968). In areas where the rational
choice model does not work so well, one has to modify it, but I have
been persuaded, at least by my own thinking and by looking at the
world and the actual data, that it does a very good job, and that there is
no other comparable approach in the social sciences with the same
degree of explanatory power, or even anywhere near.
And you can look at a lot of behavior, not only to bring in aspects
such as altruism or envy, which are now part of behavioral economics,
but also to include the idea that people discount the future
hyperbolically instead of exponentially. David Laibson, who introduced
the idea of hyperbolic discounting into economics, makes use of
axiomatization (see, for example, Laibson 1997). Everything else he uses
is very much the same as what I use. Maybe people are hyperbolic;
if that is true, we have to alter our theories, but that is where we would
need feedback from the actual data. Yet we still have a basic framework
in use, which is some version of the rational choice model. If you would
start to abandon this framework, you would end up with a loose group
of findings. If you want to abandon rational choice theory altogether,
you have to substitute it with a new framework, and I do not see
any new framework available at the moment—neither in the behavioral
economics literature nor anywhere else—that has comparable
explanatory and predictive power. That is the test.
It is an old saying that you need a theory to beat a theory. That does
not mean that you cannot extend the existing theory or modify it—you
can and you should. As we learn more, we will modify rational choice
theory. Maybe fifty years from now it will not be like rational
choice theory anymore, because by then it will have been modified and
changed in so many ways. That is how things evolve. Einstein modified
Newtonian mechanics, but Newtonian mechanics is still applied to a
wide range of phenomena.
Would you consider behavioral economics to be a revolution in
economics analogous to the transition from Newtonian mechanics to
Einsteinian relativity theory, in that, although the rationality-principle
has been questioned fundamentally, the rational choice model
remains in use in economics as a parallel framework for explaining a
wide range of behavior?
Well, of course I would not say that behavioral economics has been as
important as Einstein’s revolution; I would not compare them with one
another. In fact, I do not think that behavioral economics is a revolution.
However, it has added some insights into human behavior and those
insights, to the extent that they are verifiable, will be absorbed into
the rational choice model. They will not lead to a radical change of the
model. The real issues are how important are those insights and where
do they apply?
So, for example, the explanation that consumers were somehow
misled in the credit market, and that this in turn contributed to the
financial crisis: I think there is very little empirical support for that.
A lot of consumers were making pretty rational decisions, even those
who were taking out mortgages with low interest rates and low down
payments. Maybe they were going to default. But they did not default on
their own capital. They defaulted on the lender’s capital. So I see very
little evidence from this that consumers are not rational, in the sense
that the rational choice model cannot explain most of what they did.
How would you assess the epistemic value of these recent
developments, such as behavioral and experimental economics, in
terms of providing us with new knowledge about how the economy
I think they have been stimulating in terms of leading to further lab and
field experiments. They have shown that people can be fooled by how
a question is framed. And they have shown that similar people in
different contexts may behave differently. I think that all this is
valuable. But at the bottom line, economists deal with markets and
group responses, and there it is hard to see major modifications coming
out of behavioral economics as yet.
But has there not been a shift in the last eighty years towards
economics becoming concerned with explaining individual choices
rather than aggregate behavior?
Well there was a shift in putting much more reliance on individual
choices in terms of modeling behavior. But when you look at the data
economists have mainly used, the ultimate goal of most of the studies
is to look at how people respond to incentives. Economists can make
use of individual data panels and other data based on observations
about the individual. However, what we are interested in are aggregates
and market relations. For example, if the political aim is to subsidize
education, economists do not care about how you respond or I respond
in particular. Maybe there are differences in how Germans respond
or Americans respond, or how people who study at the University of
Chicago respond in comparison to how students from Columbia
University respond, and I guess that we would care about that. But not
about how the individual responds. In my opinion, this is a fundamental
difference between psychology and economics.
During the 1970s and 1980s various psychologists, such as Herbert
Simon, Daniel Kahneman, and Amos Tversky, showed that people
systematically violate the rationality principle and argued that
economics could be improved by making the underlying psychological
assumptions of economic theory more realistic. How seriously did you
take these new developments at the time? Did they influence you or
did they make you question your own approach? Did they inspire
your later work—for example on endogenous preferences in your
Accounting for tastes (Becker 1996)?
Well, it is hard to know where the influences come from. How I proceed
in my work is that I try to keep up with what is being researched on in
the discipline and then I think about potential contributions. Kahneman
and Tversky made contributions that were very influential and highly
cited in economics. So, for example, looking at the utility function as
hinging around some usual position—that there is a reference point and
you are highly risk averse towards losses, and so forth. I do not think it
is completely clear from market evidence that its effects are significant,
but I do believe the reference point analysis is itself important and
maybe some of that literature influenced the work I did with Luis Rayo,
very formal work on evolutionary theory where we show how to derive
reference points and some other properties (Rayo and Becker 2007).
Their work has been important to psychologists and it has had some
influence on the economics profession. And I would say it has had some
influence on my work, although it is hard for me to know exactly
how much. But I like to believe that my work has evolved and that
what I believe today is not the same as what I believed in the 1980s and
1970s. I learn from what other people are doing; that is what intellectual
interaction does for you. So I do not think their work has radically
changed my approach, but I have been affected by it.
Turning to a somewhat different issue: rationality is a concept that
originated in philosophy and its various economic formulations and
uses have been discussed extensively in the philosophical literature on
the methodology of economics, such as by Alexander Rosenberg,
Philip Mirowski, D. Wade Hands, and Mark Blaug. Were you ever
interested in that literature? Or where did you get inspiration from
when thinking about improving how rationality is conceived of in
Primarily, I get inspiration from my own discipline, economics.
For example, I wrote my doctoral dissertation on racial discrimination.
I wrote three papers before I did my work on discrimination. One was
with Milton Friedman on Keynesian models (Friedman and Becker 1957),
one was on monetary trade (Becker and Baumol 1952), and one was on
international trade (Becker 1952). I would say that the last two were
rather traditional papers; the one with Friedman was not traditional as
we were very critical of Keynesians, but I got a lot of that from
Friedman, so it was more him than me.
The work on discrimination I would say was my own work. As an
undergraduate, I always felt that economics was too narrow. I thought
of being a sociologist, but I found sociology difficult and so I was not
satisfied with it. Friedman really taught me—although his own way did
not take that path—that economics could be a powerful tool, and
I began to think about racial discrimination and how economists were
not discussing such an important topic that affects so many people.
That is how I got into it. It was not from the methodological literature.
I read some of that literature. I read Karl Popper and I studied Rudolf
Carnap when I was a graduate student here at the University of Chicago,
so I did read a lot of philosophical literature that was relevant to
economics. But I cannot say that it directed me towards the topics
I dealt with.
Friedman’s article on methodology of economics (Friedman 1953)
was very important—that I did read very carefully. I knew that article
very well and it influenced me to a certain extent. Maybe not on
the topics that I chose, but more in how I approached these topics.
That value theory does not have to be realistic in any dimension was the
part influenced by Friedman, and he got it from people like Karl Popper
and others.
Later published under the title The economics of discrimination (Becker 1957).
In an interview, the economist Leonard Rapping said that “many
Chicago people would argue that the world is in fact competitive.
They tend to believe their own pragmatic myth” (Klamer 1984, 221),
i.e., that people in fact maximize profits and utility. In your own work,
you have often denied a commitment to a realist interpretation of the
rationality-principle. In your Nobel Lecture for example you state that
the economic approach is a “method of analysis, not an assumption
about particular motivations” (Becker 1993, 385). However, to make
your approach work, the rationality-principle seems to figure as a
behavioral assumption. It has to be at least approximately true
to provide meaningful explanations and predictions; one cannot
derive a true conclusion from false premises. Could you comment
on this seeming contradiction? Does this for example reflect the
influence on your work of the strong version of instrumentalism
propagated by Milton Friedman?
The way I restated Milton Friedman’s view in my own thinking is that
one cannot evaluate a set of assumptions individually. You have to
evaluate the whole set of assumptions collectively, because that is what
a model is: a collective set of assumptions about behavior that is
predicting behavior. And how do you evaluate a collective set of
assumptions? It is very difficult to say “this assumption does not work”
a priori, because it is the collective set what is relevant. The only way
to evaluate assumptions is to ask whether this collective set of
assumptions is in fact explaining behavior. Are you doing well in
predicting and understanding how people respond to a tax cut, tariffs,
globalization, returns to education, and the like? So that is my
Now, it is true that I like to believe that the individual assumptions
are in some sense reasonable, but you have to look at them
together. And I think that this is a problem with the behavioral
economists. They take an assumption, for example that people cannot
calculate probabilities very well and that there are other people on the
other side who will try to exploit that weakness in them and will offer
them various deals. If there is competition on the other side of the
market that will mean that they will be offered some compensation.
That is what competition does. For example if we play any kind of
gamble, let us say we throw a dice and you think that the most likely
outcome is ten, well I can exploit that. I do not even have to cheat, let us
play. But if a lot of people are going to want to exploit you, we are going
to have to compensate you. So you have to ask what the market
equilibrium looks like. You are a fool, but the market is competing
to take advantage of that. That is how I would analyze that problem, and
that has been one of my critiques of some of the behavioral economists:
they do not embed their insights in a complete model of behavior.
Are you thereby implying that equilibrium analysis is a worthwhile
You do not need to use the concept of a complete equilibrium. You can
do it with modified equilibrium: as long as there are other people who
are recognizing that I am a fool, they would compete. If you were the
only person with that information, you could exploit it. A monopolist
for example could exploit me. One of the great advantages of
competition is that it prevents such exploitation, and you do not need
perfect competition to have a strong effect in that direction.
So how does equilibrium analysis feature in your ‘economic
Economists from the Austrian school hate equilibrium analysis in some
sense, but I never understood their criticism. What do philosophers not
like about equilibrium analysis?
Philosophers raise several objections against this way of analyzing
the economy, one being that the application of the concept of
equilibrium to an environment which is actually never in equilibrium
is meaningless and does not provide us with any understanding about
the real world. Take, for example, comparative statics.
But what do they substitute for it?
Well, philosophers do take a critical perspective; they often tend to
evaluate the shortcomings of a theoretical framework first.
Yes, but as I said before, you need a theory to beat a theory. I think the
equilibrium concept in economics is very subtle. It could take into
account and does often take into account dynamic issues, changes—it is
not static and it is not stationary. You have dynamic models of behavior
that incorporate the concept, so they are still equilibrium models but
it is dynamic equilibrium. It is a broad issue.
I have read some of the literature on the critique of equilibrium, not
so much by philosophers but by the Austrian school of economics, and
I could just never make sense out of it, because I do not see what they
are substituting for it. Even Friedrich Hayek, who is listed as one of the
top Austrians, if you read his analysis, you see that he is using
equilibrium analysis.
But Hayek suggested the concept of a ‘reflective equilibrium’, which
has however so far not been formalized.
Well, dynamic equilibriums can be formalized, as dynamic general
equilibrium analysis does. I agree with you that a lot of analysis needs
to be dynamic and comparative statics is not the right analysis for every
issue. In economics, we are of course trying to improve, but I think we
can do so with the tools we have available. I do not think that there is in
principle any philosophical barrier to doing so. We could do it with a
rational choice model or any other model. I do not think that would
destroy the concept of equilibrium, and I do not think we should try to
destroy it, because I think it is a very valuable concept.
In your work, you mainly look at aggregate demand and supply
curves. In your textbook Economic theory (1971), for example, you
look at a model of the irrational behavior of households to show that
“the basic demand relations are derived fundamentally from scarcity
alone rather than from an assumption that behavior is ‘rational’ and
that the main conclusions of demand analysis [i.e., negatively inclined
market demand curves] stem from a much more general principle
than rational behavior—the scarcity of resources that defines an
economic problem. Accordingly, we are able to derive the usual
demand functions even when households behave ‘irrationally’”
(Becker 1971, 11 fn.). Yet, you go on to use the concept of rationality
because of the power of the implication “consumers prefer more to
less” (which is empirically questionable) and you say that a model
that implies such behavior is to be preferred. Why is that to be
preferred? And why exactly do you need rationality if scarcity is what
is fundamental? Or, to put it differently, do you think that the
rationality-principle is a necessary ingredient of economic theory and,
if so, why?
Do you think it is empirically questionable that people prefer more to
less? I do not think so. I do not see people giving away, except to charity
but that is another good we would introduce. Yet, looking at the world,
do you see many people who prefer less to more?
Well people become satiated or even reject striving for endless
material improvement.
Are people satiated with regard to leisure? Anyway, let us get back to
your question. I argued that the rationality assumption is required
to introduce the aspect that people prefer more to less, which in turn
helps us to understand market outcomes and explain prices. In the
analysis you cited I assumed that prices are given to consumers and
producers, but I think you need to have some analysis to answer the
question, where do prices come from? Maybe there are other theories
you could use but you need to amend or add to the probabilistic type
models some theoretical framework that tells you what types of prices
are finally picked out. And for that, rational choice analysis really is very
Are you after truth?
Absolutely! I think there is a truth out there. We are only approximating
it but we are getting better. I think that the goal is to find the truth and
I think there is something like that. I know that there is a lot of
philosophical discussion about what truth is, which I however do not
really find useful. I think there is a truth, and I think that economists
have found a significant amount of the truth in economic behavior.
There are a lot of things we do not know, but there are also a lot of
things we do know, which the non-economist gets completely wrong.
A simple idea like showing that when gasoline is substituted, people are
going to buy more gasoline elicits some truth about people’s behavior.
And these are important truths. This is what I call the truth in a
particular case and this is what I want to find out and analyze. So, yes,
I am after the truth.
Becker, Gary S. 1952. A note on multi-country trade. American Economic Review, 42 (4):
Becker, Gary S. 1957. The economics of discrimination. Chicago (IL): Chicago University
Becker, Gary S. 1968. Crime and punishment: an economic approach. Journal of
Political Economy, 76 (2): 169-217.
Becker, Gary S. 1971. Economic theory. New York: Alfred A. Knopf.
Becker, Gary S. 1976. The economic approach to human behavior. Chicago (IL):
University of Chicago Press.
Becker, Gary S. 1981. A treatise on the family. Cambridge (MA): Harvard University
Becker, Gary S. 1993. Nobel lecture: the economic way of looking at behavior. Journal
of Political Economy, 101 (3): 385-409.
Becker, Gary S. 1996. Accounting for tastes. Cambridge (MA): Harvard University Press.
Becker, Gary S., and William J. Baumol. 1952. The classical monetary theory: the
outcome of the discussion. Economica, 19 (76): 355-376.
Choi, Young Back. 1993. Paradigms and conventions: uncertainty, decision making, and
entrepreneurship. Michigan: University of Michigan Press.
Friedman, Milton. 1953. The methodology of positive economics. In Essays in positive
economics, M. Friedman. Chicago (IL): Chicago University Press, 3-43.
Friedman, Milton, and Gary S. Becker. 1957. A statistical illusion in judging Keynesian
models. Journal of Political Economy, 65 (1): 64-75.
Klamer, Arjo (editor). 1984. Conversations with economists: new classical economists
and opponents speak out on the current controversy in macroeconomics. Totowa:
Rowman & Littlefield Publishers.
Laibson, David. 1997. Golden eggs and hyperbolic discounting. Quarterly Journal of
Economics, 62 (2): 443-478.
Rayo, Luis, and Gary S. Becker. 2007. Evolutionary efficiency and happiness. Journal of
Political Economy, 115 (2): 302-337.
The Nobel Prize in economics 1992: press release. Website.
(accessed January 30, 2012).
Gary S. Becker’s Webpage:
... The topics of economists' works show that the content of what economists do has shifted and broadened on numerous occasions. For example, the expansion of economics by Becker (1981Becker ( , 1993Becker ( , 2010 to cover explanations of family behavior and other fields of human activity (addiction, sports, restaurant visits) has changed and enlarged the terrain of economics (also Herfeld, 2012). It is difficult to clearly define where one academic domain starts and ends as well as where and when another academic domain takes over clear responsibility. ...
Causes for the distinct and growing separation of the academic domains of economics and neighboring fields are ongoing processes of specialization, fragmentation, and evolution. Thanks to the proliferation of publications and knowledge in economics, degrees of specialization have emerged. One of the great paradoxes in economics is the existence of mainstream economics, which is taught to undergraduate students and dominates textbooks, alongside new contributions that enter the arena via other disciplines (e.g., psychology, history, and law). The paper delineates some developments in economics over the last 100 years oscillating between continuity and change. Especially, the interplay between different domains in the social sciences is discussed as fields of tension and cooperation between economics and other disciplines. The message of the article is that economics is not a homogeneous body of being, content, and learning. Economics has a diverse knowledge base on a theoretical and methodological level with different forms of economic capacity, conceptual sensitivity, and methodological rigor. Many different approaches coexist with corresponding camps of authors. A multiplicity of topics and discourses can be observed with an interesting division of economics with one branch focused on mathematics, econometric tools, and applications, and the other branch moving towards increasing social scientification with strong links to psychology, history, philosophy, and sociology. The Oxford credo of politics, philosophy, and economics (PPE) has undergone a revival in this respect.
... Conversely, for the mainstream of the profession, behavioral discoveries do not bring paradigm change (Coyle 2010: 268). Even against the post-crisis tide of critique, prominent mainstream economists reject the idea of change, reaffirming their commitment to the rational expectations postulate (Cassidy 2010;Herfeld 2012;Lucas 2009;Taylor 2010). ...
Abstract In light of Thomas Kuhn’s view that paradigm change requires the existence of an alternative paradigm, this inquiry examines whether behavioral economics provides a foundation for change in economics. Drawing on Kuhn’s account of normal science that integrates science as a social system and a system of ideas, it critically examines the institutional and conceptual standing of behavioral economics relative to the mainstream paradigm and the alternative proposed by radical political economics with a view to assess the extent and the quality of change behavioral economics can impart to the dominant tradition of normal science in economics. Keywords paradigm change, behavioral economics, scientific community, mainstream paradigm, radical economics A14, B0, B4, B5
... Człowiek ma prawo wierzyć, że w rzucie kostką najczęściej wypada dziesięć oczek; racjonalny przeciwnik będzie korzystać na błędzie dopóty, dopóki ma monopol na grę. Gdy takich racjonalnych przeciwników będzie więcej, konkurując i proponując coraz wyższą rekompensatę, sprawią, że efekt błędnego przekonania zniknie (Herfeld, 2012). (Becker, 1957). ...
... Vanberg [9] outlined several principles in the approach of rational principle and rational hypothesis; and emphasized the purposed of human behavior, to solve the problem, we must take rationality into account to avoid possible mistakes. Herfeld [10] states the potentials and limitations of rational choice theory and argues that this research theory can be applied to the analysis of individual choices across economic fields, discrimination, education (human capital), crime, addiction, family (marriage, divorce, fertility), and altruism. Knottnerus and Guan [6] analyze rational choice theory from a sociological point of view. ...
... Conversely, for the mainstream of the profession, behavioral discoveries do not bring paradigm change (Coyle 2010: 268). Even against the post-crisis tide of critique, prominent mainstream economists reject the idea of change, reaffirming their commitment to the rational expectations postulate (Cassidy 2010;Herfeld 2012;Lucas 2009;Taylor 2010). ...
In light of Thomas Kuhn’s view that paradigm change requires the existence of an alternative paradigm, this inquiry examines whether behavioral economics provides a foundation for change in economics. Drawing on Kuhn’s account of normal science that integrates science as a social system and a system of ideas, it critically examines the institutional and conceptual standing of behavioral economics relative to the mainstream paradigm and the alternative proposed by radical political economics with a view to assess the extent and the quality of change behavioral economics can impart to the dominant tradition of normal science in economics.
... Neoklasicisma teoriju par patērētāju uzvedību Bekers izmanto, analizējot individuālas izvēles ārpus tradicionālās ekonomikas jomas. Tā ietver, piemēram, diskrimināciju, izglītību (cilvēkkapitālu), noziedzību, atkarības, ģimeni (laulība, šķiršanās) un altruismu (Herfeld, 2012). ...
Bachelor’s paper „Reasons for choosing veganism as a lifestyle. Example of Riga” author studied how veganism integrates into the life of an individual, who lives in Riga, as well as the main reasons for becoming a vegan. The aim of the paper is to find out the reasons for choosing veganism as a lifestyle. Another aim of the papar is to ascertain media attitudes towards veganism. As the theoretical framework of the research, author used the theory of rational choice, as well as articles and researches about veganism. The goal of Bachelor’s paper is achieved by a qualitative research approach – semistructured interviews. Author conducted 15 interviews with vegans who live in Riga. In addition, the author wanted to find out about media constructed attitudes towards veganism. Author conducted the contentanalysis of the most popular news media in Latvia.
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The terrorist attack of September 11, 2001 in the United States of America was the beginning of a traumatic era in which terrorism became a serious threat to people’s lives, properties and economic activities of many nations around the world. The principal actors of the global terrorism include: Al-Qaeda, Boko Haram, Ansar Dine, Al-Shabaab, Taliban, and Islamic State of Iraq and Levant whose activities contributed in slowing down economic activities with attendant direct damaging effects in terms of job losses, migration flow and decrease in people’s standard of living. Due to terrorism, many affected nations in the world have committed huge resources to reduce and eventually eradicate the threat. Yet, the attainment of this objective can be elusive in the absence of a thorough knowledge and understanding of the behavioural pattern of the individual terrorist or terrorist group. From the microeconomic supply side approach, this paper uses the rational choice theory to explain the motivations and rational behaviour of a “terrorist enterprise”. For more terror is preferred to less for a “terrorist enterprise”, its decision making consists in identifying the most cost effective way of creating huge psychological effects on the population, hence its preference for asymmetric war approach - with a relatively lower cost for a maximum level of terror- rather than the conventional one which requires enormous human and material resources to achieve the same level of terror. This cost minimising approach has enabled to identify the determinants of terrorist activity. Such variables could help governments around the world to design an effective counterterrorism strategy of “deterring, detecting and disrupting” terrorist enterprises activities to achieve the objective of “zero degree of terror” in their countries
Since its inception in the late 1970s, behavioural economics has gone from being an outlier to a widely recognized yet still contested subset of the economic sciences. One of the basic arguments in behavioural economics is that a more realistic psychology ought to inform economic theories. While the history of behavioural economics is often portrayed and articulated as spanning no more than a few decades, the practice of utilizing ideas from psychology to rethink theories of economics is over a century old. In the first three decades of the 20th century, several mostly American economists made efforts to refine fundamental economic assumptions by introducing ideas from psychology into economic thinking. In an echo of contemporary discussions in behavioural economics, the ambition of these psychology-keen economists was to strengthen the empirical accuracy of the fundamental assumptions of economic theory. In this article, we trace, examine, and discuss arguments for and against complementing economic theorizing with insights from psychology, as found in economic literature published between 1900 and 1930. The historical analysis sheds light on issues and challenges associated with the endeavour to improve one discipline’s theories by introducing ideas from another, and we argue that these are issues and challenges that behavioural economists continue to face today.
Objectives. In this paper, consumer behaviour is analysed following the criterion of behavioural economics and how it affects digitalisation, and the current change in consumer trends. Methodology. It is based on a search of behavioural economics studies and theories arising within this field, such as the Nudge Theory. Having gained an understanding of consumer behaviour, this was taken to the digital arena and the different ways of obtaining information from users to learn about their behaviour in this area and its impact, were analysed. Results. By studying behavioural economics, the conclusion was that there are differences with classical economics, which asserts that people’s decision making is rational, while behavioural economics argues that we are influenced by many aspects. This taken to the world of digitalisation translates as the great importance to companies of collecting data from users in order to learn about them and be able to predict their behaviour. Limitations. There are few studies on behavioural economics within the digital field, and there is less information on consumer behaviour online as offline.
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The main target of this paper is to show a behavioral economics approach to –some– public policies from a descriptive and a normative point of view. To meet the target, (i) the paper summarizes two cognitive biases: the status quo bias and the endowment effect, and then shows how these biases could affect the effectiveness of public policies in some relevant contexts: the availability of human organs for transplantation; people's bad eating habits; and environmental resources management. In addition, (ii) the paper suggests some strategies (nudges) about how behavioral economics could inform policy maker to design or to improve the public policies in each of those referred contexts.
I. INTRODUCTORY Recently a number of economists have shown a revived interest in the monetary theory of the classicists and of the members of the Lausanne School and their successors.2 It has been maintained that all of these authors held basically common views which have been called " the classical system ". Moreover, it has been argued that this system suffers from serious formal shortcomings, in particular that either it is inconsistent or it must leave the absolute price level indeterminate. We believe a summary of the results of the discussion is now appropriate, and that the conflicting views can be evaluated and to some extent reconciled. Moreover, the arguments can be stated rigorously without recourse to the mathematical apparatus which has been employed. A detailed restatement is therefore included in the belief that the discussion will become available to many who did not follow it before. For our purposes we may consider the attack on the earlier writers to have been opened by Lange [I3], although the discussion, as is indicated below, goes back much further. However, the immediate centre of contention is Patinkin's restatement and refinement of the Lange position. We shall therefore describe the Lange-Patinkin version of the classical system and the difficulties which they have shown to be inherent in it. A more satisfactory structure which Patinkin has called " the modified classical system " will then be outlined. Finally, it will be argued through reexamination of some of the classical writings that most of the group probably never held views like those ascribed to 1 The authors are indebted to Professors Viner and Brunner for their comments and suggestions.
Milton Friedman (1912–2006) was born in Brooklyn, New York, and received his Ph.D. in economics from Columbia University. He taught at the University of Minnesota, and then for many years at the University of Chicago. After 1977, he was a Senior Research Fellow at the Hoover Institution in Stanford, California. Friedman is best known for his work in monetary theory and for his concern for free enterprise and individual liberty. Milton Friedman was awarded the Nobel Prize in economics in 1976. The following essay, which is reprinted in its entirety, is the most influential work on economic methodology of this century. In his admirable book on The Scope and Method of Political Economy John Neville Keynes distinguishes among “a positive science … [,] a body of systematized knowledge concerning what is; a normative or regulative science … [,] a body of systematized knowledge discussing criteria of what ought to be …; an art … [,] a system of rules for the attainment of a given end”; comments that “confusion between them is common and has been the source of many mischievous errors”; and urges the importance of “recognizing a distinct positive science of political economy.” This [essay] is concerned primarily with certain methodological problems that arise in constructing the “distinct positive science” Keynes called for – in particular, the problem how to decide whether a suggested hypothesis or theory should be tentatively accepted as part of the “body of systematized knowledge concerning what is.”
Since his pioneering application of economic analysis to racial discrimination, Gary S. Becker has shown that an economic approach can provide a unified framework for understanding all human behavior. In a highly readable selection of essays Becker applies this approach to various aspects of human activity, including social interactions; crime and punishment; marriage, fertility, and the family; and "irrational" behavior. "Becker's highly regarded work in economics is most notable in the imaginative application of 'the economic approach' to a surprising breadth of human activity. Becker's essays over the years have inevitably inspired a surge of research activity in testimony to the richness of his insights into human activities lying 'outside' the traditionally conceived economic markets. Perhaps no economist in our time has contributed more to expanding the area of interest to economists than Becker, and a number of these thought-provoking essays are collected in this book."—Choice Gary Becker was awarded the Nobel Prize in Economic Science in 1992.