My preferred term would be: human ;-)

@17 I agree with you regarding regulatory implications, what I meant to say was that it seemed unlikely to me that you would derive support for large-scale macro intervention, like the recent stimulus, from a standard GE model with a little bit of bounded rationality bolted on.

Papers in this tradition showed that small deviations from rationality can sometimes have big effects on economic outcomes. But they rarely have big implications for public policy. Rather, they point in the direction of the idea set out by Cass Sunstein and Richard Thaler in their recent book Nudge. Sunstein and Thaler argue that governments can sometimes exploit deviations from rationality by framing choices that will ‘nudge’ people’s decisions in a socially desirable direction.

Professor Quiggin, I’m curious if you can expand on the half paragraph about behavioral economics. I’m largely in agreement with your evaluation that recognition of bounded rationality has had only limited impact on public policy decisions, but it might be quite clarifying if you said a bit more about the limits of the “Nudge” approach.

FWIW, it’s not clear to me that behaviorally informed public policy must always be small and aimed at consumers. Once the idea is taken seriously, it can have quite serious regulatory implications – if in a certain sector bounded rationality makes it systematically more profitable for firms to exploit consumers than to satisfy their long term (or subjectively endorsed) preferences, then there’s a prima facie case for significant regulatory reshaping of those sectors of the market. Some of the proposals for the new Consumer Financial Protection Agency in the United States seem headed in this direction.

For a recent discussion of these broader implications of bounded rationality, see Michael S. Barr, Sendhil Mullainathan, and Eldar Shafir, “The Case For Behaviorally Informed Regulation,” at http://www.tobinproject.org/twobooks/pdf/New_Perspectives_Ch2_Barr_Mullainathan_Shafir.pdf (full disclosure: I co-edited the volume that this paper appeared in, “New Perspectives on Regulation”).

But let’s hop on to your next snippet, shall we ;-)

That said, it is possible to learn (or be taught) to avoid particular errors in reasoning, especially if others are trying to exploit those errors. And, as Kenny says, it is possible to present information in ways that make it easier or harder for people to reach the ‘right’ decision; roughly the one they would choose if they were unboundedly rational and at least moderately altruistic/socially concerned.

Kenny, I don’t see how you can educate human individual agents out of their bounded rationality. The preferences are real even if not rational; the only education is to get a critical attitude, and, on the macro-level to ensure that in society there is room for all things to be critically looked upon. Other than that, people will continue to gamble, in the full knowledge that they will, on the average, loose.

JoB, I certainly plan more on bounded rationality, and I certainly should cover T&K. There will be some of this in the “What next” section of this chapter (another hard bit) and I should go back to the EMH chapter and put a bit more in there.

Kenny, you got the point, even if it did seem a bit shoehorned. Any suggestions to fit it more neatly, or should I cut the reference to Lakoff – it was only an aside.

I guess the ideas of Sunstein and Lakoff do have the following relevant similarity. Traditionally, we assume that people are fully rational. Under this assumption, giving them more choices and more information will generally lead them to make the decisions that are best (at least with respect to their own interests, even if not with respect to societal interests). However, following the work of Tversky and Kahneman (and many other psychologists, and I suppose some cognitive linguists and behavioral economists) we know that people aren’t rational in the relevant way. By understanding the ways in which they fail to be rational, we can present choices or information to them in ways that maximize the likelihood that people will end up actually acting in ways that are best (with respect to their own, or societal, or our, interests).

To present the ideas in the way that makes them seem properly parallel, like that, it seems to me that you really end up focusing on the ways that they manipulate people’s irrationality. It doesn’t quite seem that this is the way the Keynesian wants to think about it though. Rather, the Keynesian seems to want to figure out what the structure of equilibria is under the assumption that people behave in the more descriptively accurate irrational way, and then figure out how interventions interact with the structural features. With Sunstein and Lakoff, it seems to be more about intervening on individuals, still treated as individuals, which ends up feeling more manipulative or paternalistic. With the Keynesian, it sounds like the idea is almost to ignore the individuals and intervene on the macro structure directly. We may still be manipulating the individuals, but we aren’t doing so in a way that intends to manipulate their individual decisions directly – instead we only care about the individual decisions because of the role they play in creating the larger economic structures.

Is the more serious quantitative (micro?-)stuff on bounded rationality still to come, or are you going to stick with the semi-poetic (macro?-)stuff?

There should be some economics stuff based on T&K, isn’t there?