the real power of pop economics

Nice insight from Andrew Gelman:

I think the real power of pop-economics as a tool for explaining life is that it has two opposite forms of explanation:

1. People are rational and respond to incentives. Behavior that looks irrational is actually completely rational once you think like an economist.

2. People are irrational and they need economists, with their open minds, to show them how to be rational and efficient.

Argument 1 is associated with “why do they do that?” sorts of puzzles. Why do they charge so much for candy at the movie theater, why are airline ticket prices such a mess, why are people drug addicts, etc. The usual answer is that there’s some rational reason for what seems like silly or self-destructive behavior.

Argument 2 is associated with “we can do better” claims such as why we should fire 80% of public-schools teachers or Moneyball-style stories about how some clever entrepreneur has made a zillion dollars by exploiting some inefficiency in the market.

The trick is knowing whether you’re gonna get 1 or 2 above. They’re complete opposites!

It’s like Freudianism: if a person does X, that’s because of trauma Y that occurred early in life. But if the person does not do X, that’s also because of Y, it’s just that this time it’s repression. You can explain anything.

Theories that can explain anything are not necessarily useless. They can give understanding and point the way to further study. But it’s good to recognize ahead of time that the story could go in either direction.

This is, of course, no less applicable to psychology than it is to economics. And there probably is a unifying account — something like “people are rational given the information they have and their valuations of outcomes.” But of course that makes things kind of hard to specify.

If you buy that unification, here’s an interesting follow-up: Does it require us to prepend “neurotypical”? Or can we describe the decision-eroding effects of brain damage and mental illness purely in terms of information and valuation?


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