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Floris Heukelom, Behavioral Economics. A History

Andreas Ortmann
p. 259-267
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Floris Heukelom, Behavioral Economics. A History. Cambridge University Press, 2014, 238 pages, ISBN: 9781107039346

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1Behavioral Economics (BE) is everywhere these days. See for example the World Development Report 2015 (World Bank Group 2014) that takes an unabashedly partisan BE perspective to reflect on mind, society, and behavior; or see the “Behavioral Insights teams” or “nudge units”, often located near the pinnacle of power, that have popped up all over the world. Google them.

2As characterized by Camerer and Loewenstein, “[b]ehavioral economics increases the explanatory power of economics by providing it with more realistic psychological foundations” (2004, 3). Heukelom cites this, by now classic, description on page 1. It strikes me as little more than a highly problematic assertion. Note what its implications are: Economics, for starters, is conceptualized as being not realistic. It also needs, presumably urgently, psychological foundations to increase its explanatory power. Given that economists have embraced lab and field experiments for many decades (e.g., Ortmann 2013, Svorencik 2015), and given the sorry state in which psychological science finds itself these days—replication crisis (e.g., Chambers 2014) anyone?—as well as the controversy that has for a long time swirled around the heuristics-and-biases program (e.g., Gigerenzer 1996; Kahneman and Tversky 1996; Gigerenzer et al. 2008), these are daring statements at best.

3Heukelom has attempted to write a history of BE. It is an ambitious goal and he is the first to have done so in book form. As Roth noted two decades ago, “many contemporary experimental economists carry around with them different and very partial accounts of the history of the field” (1995, 4). The same is surely true for those associated with BE. Hence attempts at writing that history by people who may not have an incentive to sway the narrative their way, ought to be welcome. There is an obvious drawback: Those who did not participate directly in the emergent discipline have to reconstruct history from the facts that they can get their hands on. That is a genuinely difficult task since it involves tracking down an ever expanding universe of researchers that interact in myriad ways, formally and informally, with each other and quite likely other disciplines. How does one trace the sum total of interactions, or shifting social networks, and what they brought about? Moscati (2007) has provided a useful template for attempts at quantification of influence. Other ways are possible but will require huge data bases. Heukelom relies on a narrative that, while often claiming influence, does not quantify it.

4Heukelom’s book (namely chapters 3 – 6) draws on four earlier publications that in turn were modified versions of chapters of his dissertation (Heukelom 2009). The process of repeated revisions has made them better.

5In Chapter 1 Heukelom relates John Stuart Mill’s methodological ideas to Wallis’ and Friedman’s well-known critique of the Thurstone (1931) experiment which questioned the artificiality of the experimental setting and the fact that choices were hypothetical. Regarding this critique, there is little that was not already discussed in Moscati (2007), Lenfant (2012), and Ortmann (2013[2010]). An interesting extension is the elaboration of the claim, drawing on Leonard (2010), that “[t]he implicit Millian epistemology of Wallis and Friedmann is very similar to the epistemology of von Neumann and Morgenstern‘s Theory of Games and Economic Behavior” (20). The Theory of Games and Economic Behavior was based on the assumption of much of early decision theory that people were rational in a way that could be axiomatized. Heukelom seems to suggest that over time axioms were increasingly considered testable. “The interpretation of the Von Neumann & Morgenstern (2004[1944]) axioms gradually evolved into a situation in which psychologists could understand economists’ use of the axioms or assumptions as empirical claims to be verified or refuted. And refuting the axioms empirically is what the psychologists did.” (27) How that story unfolded, Heukelom addresses in chapter 5.

6In Chapter 2 Heukelom explores the incorporation of Von Neumann and Morgenstern’s axioms in economics and psychology. Savage’s indebtedness to the Wallis-Friedman critique is documented, the collaboration between Friedman and Savage is discussed, as well as where Friedman – Savage and Von Neumann – Morgenstern agreed (in their conceptualization and rationalization of individuals’ responses to risk) and where they disagreed (FS: individuals always behave rationally. VNM: individuals endeavor to act rationally; FS: utility can be expressed in money and money equivalents, VNM: utility and money are not to be equated). The “economic opposition” to these views is then paraded and attached to the names of Baumol, Allais, and Samuelson. These three argued that behavioral axioms were descriptions (rather than general characterizations). In the context of these disputes, Heukelom uncovers some interesting archival material that shows that nasty characterizations of others’ work has always been a forte of at least some economists (e.g., Samuelson on Mosteller and Nogee, 1951, see 37). He also traces how Allais—whose “paradox” became one of the key exhibits against Expected Utility Theory (but see Mongin 2013)—got into the game. Famously, Allais asked Savage during a 1952 symposium in Paris over lunch two connected decision problems for which there was a normatively correct answer according to Expected Utility Theory. Savage gave the answer that eventually produced dozens of papers on the alleged violations of that norm, with many of these papers showing that it did not take much to make them disappear (e.g., Conlisk 1989, and most recently Huck and Mueller 2012).

7Savage’s violation of the norm and subsequent confirmations of this and related violations (prominently in the 1979 Econometrica article by Kahneman and Tversky that introduced prospect theory but also used the hypothetical choices that Wallis and Friedman had savaged earlier) contributed to the emergence of the heuristics and biases program and BE. The chapter reflects the considerable sleuthing that Heukelom did on the interaction between Allais and Savage. It is less impressive when he discusses mathematical psychology and behavioral decision research in the fifties. It is particularly surprising not to find any mention of Sidney Siegel in this context (and for that matter anywhere in the book; see Ortmann 2013, and Innocenti 2010, for Siegel’s importance to Experimental Economics and, because of important methodological discussions between economists and psychologists, between experimental and behavioral economists).

8As mentioned, a variant of chapter 3 had previously been published. Heukelom argues that “it cannot be emphasized enough how different the psychological program was from the economic approach” (71) The increasing importance of social engineering (previously also discussed in books such as Lemov 2005) is discussed here, as is “psychology at Michigan” including the work of the Survey Research Center founded by George Katona who is credited with having used the term “behavioral economics” as early as 1947. Heukelom (95) argues that the University of Michigan was pre-eminent in (mathematical) psychology and that this preeminence lasted until the 1970s. Again, Heukelom unearthes interesting facts from the archives and demonstrates that the various research centers in psychology in Michigan were a hotbed of social and behavioral science research advances throughout the fifties and sixties, as reflected in publications such as Krantz et al. (1971), Suppes et al. (1989), and Luce et al. (1990). It is in Michigan that indeed a number of characters appear that became household names: Ward Edwards, of course, and Tversky (one of his students) in particular. These behavioral psychologists interpreted the work of Von Neumann and Morgenstern as having introduced the concept of stochastic preference, i.e. the belief that preferences are not completely determined. This brought about further questions about what constituted rationality and how to assess it, the latter question being inextricably linked to the question of measurement of utility. Heukelom concludes that “in the 1950s and 1960s mathematical psychology and behavioral decision research considered themselves to be directly related to economics and drew on substantial amounts of economic literature.” (91) But, “[t]ogether with Daniel Kahneman, Tversky, in particular came to strongly oppose the fundamental assumption of Savage and Edwards that, by and large, human beings make their decisions in accordance with the normative rules of decision theory.” (95)

9In Chapter 4, Heukelom reflects on the individual work of Tversky (4.1.) and Kahneman (4.2.) and their eventual collaboration (4.4.), now widely known as the heuristics-and-biases program which also brought about prospect theory. Being an Edwards student, Tversky initially seems to have also been convinced that human beings make their decisions in accordance with the normative rules of decision theory but in 1969 he published an article in which the intransitivity of preferences was demonstrated and hence the fundamental assumption needed for the construction of ordinal utility function was undermined. This led him to formulate a theory of choice based on elimination by aspects that he published a couple of years later. Interestingly, in light of the later work by the ABC group (Gigerenzer and Todd 1999), “elimination-by-aspects turned out to be a road not taken” (105), at least by Tversky. The ecological-rationality agenda of Gigerenzer and Smith and others working on heuristics gets for the most part ignored these days by BE proselytizers. Instead, “[i]n the late 1960s and early 1970s, Kahneman offered Tversky a solution that accepted the experimental behavioral deviations as valid while at the same time leaving intact the fundamentals of measurement theory and decision theory” (105) That solution was prospect theory (Kahneman and Tversky 1979) that—in conjunction with economists’ attempts to address preference reversals (prominently, Grether and Plott 1979, 1982)—made Kahneman and Tversky and their heuristics-and-biases agenda palatable to economists. What explains the success of the Kahneman – Tversky perspective? Pages 124 – 131 of Heukelom’s book are dedicated to an answer.

10Heukelom identifies two major reasons. First, he argues that “Kahneman and Tversky’s research changed that [the assumption held by Edwards and Savage, Morgenstern and Von Neumann that “human beings in principle make their decisions in accordance with the axioms of rationality”], but without directly discrediting the earlier work of Savage and Edwards or that of the economists.” (126) Second, he argues that it was the new type of experiments—hypothetical choices embedded in intuitively appealing examples—that powered the success. Hypothetical choices had, of course, been savaged by Wallis and Friedman and it is no coincidence that in their 1979 Econometrica article Kahneman and Tversky were forced to address this issue head on (265). It was arguably the fact that economists like Grether and Plott took the work of “the psychologists” serious that helped to establish the viability of the heuristics-and-biases program among some economists. It is interesting that all this happened while all the way during the 1980s and 1990s the very same program was under attack by other psychologists (125).

11In Chapter 5 Heukelom finally gets to the emergence, or “construction of Behavioral Economics” (133). He gives credit to Grether and Plott (1979, 1982) who he claims were led by their results “to completely discard preference theory as a valid description of (what they would come to label as) initial human behavior” (133, see also 167 for a similar statement). I am pretty sure that neither Plott nor Smith would agree with that statement (see Ortmann 2003, Ortmann 2009; Smith 2003, 2008). Heukelom then identifies Thaler as the leader of “an initially diverse and unorganized group of financial and other economists” (134) that saw the biases documented by Kahneman and Tversky in their work throughout the seventies as being related to anomalies in financial markets and prospect theory as the appropriate (and superior) theoretical model to explain those results (e.g., Thaler 1980, 1985). In Section 4 Heukelom discusses the catalyzing role that the Sloan – Sage behavioral economics program had in propelling BE to the prominence it has today. Here some sleuthing adds again to our understanding of the Sloan – Sage story (see fn 4, 149, and footnotes throughout the chapter). It’s interesting to read for example about the objections that people like Simon and Smith had (e.g., 163) but hardly surprising in light of Smith’s well-documented and blunt criticism of the heuristics-and-biases program (see Smith 1991 and 2003, and there the very pointed fn 8). The problem with the chapter is its ad-hockish nature. There is no hard evidence here in terms of papers having influence, for example.

12In Chapter 6 Heukelom continues his narrative with a similar strategy. Identifying the 1980s as the take-off phase, he sees the next couple of decades as the climbing phase, to stay in the aviation metaphor. Intertemporal choice and dual-systems approach are featured as prominent examples of behavioral examples, as is the Camerer et al. (1997) study on New York taxi drivers which is here featured prominently as a “well-known descriptive falsification” (173) of the exponential discounting model. This is a rather partial account of that literature. How about Farber (2005, 2008), or for that matter, Stafford (2015)? The fact of the matter is that pretty much every anomaly or bias that BE has come up with to this day has been contested. Even people like Loewenstein, prominently featured as a leading behavioral economist in this chapter, have questioned the overselling of it (Loewenstein and Uebel 2010).

13There is a brief discussion in this chapter about what distinguishes Behavioral and Experimental Economics and Heukelom mentions “extensive discussions between economists and psychologists” (188) about differences in experimentation practices such as the use (non-)use of deception. Interestingly, the use of financial incentives, and for that matter the issue of hypothetical choices, is not mentioned in this context even though it was just as big a bone of contention among economists and psychologists, or behavioral economists, over that time period if not more so (e.g., Hertwig and Ortmann 2001).

14In a brief Epilogue of 8 pages, Heukelom wraps up and provides an overall assessment, concluding among other things that

behavioural economists have steered economics into an entirely new direction. Instead of reasoning from a few intuitively clear principles of human behavior, behavioral economists now start from descriptions of human behavior that can only be inferred from direct empirical observations in experiments and statistics. And instead of arguing that as scientists economists should first of all refrain from discussing toward which ideal policy makers should direct the economy, behavioral economists have given economists a moral obligation to use their knowledge of the normative theories of rational behavior to help individuals act more rationally on their preferences. (200)

15I certainly take issue with the claim in the first sentence. If anything it was experimental economics that steered economics in a new direction. BE has undoubtedly helped to strengthen the empirical foundations and has forced important debates on (experimental) economics such as those on the reality of cognitive illusions and the questions of the appropriate rationality and knowledge assumptions, or the question of (the elicitation of) time preferences rates and risk attitudes.

16Heukelom has worked hard to establish his credentials as historian and I find indeed most interesting, and persuasive, those parts where he reports the results of his considerable sleuthing. But notwithstanding his archival work, and the interviews and emails documented in many a footnote, this book is based on comparatively few glimpses in an expanding universe whose big bang can be located somewhere in the seventies or eighties. And those glimpses by their very nature are unlikely to unlock tacit knowledge accumulated over decades. Plus, his glimpses are by no means based on representative sampling or attempts at quantification. His narrative is quite freely spun and while I agree with parts of it, there are many places where I disagree.

17The key problem of Heukelom’s approach, and also of that in Svorencik (2015) is that there is no serious attempt here, as for example in the excellent Moscati (2007), to establish sequentiality and influence with some hard numbers. Ideally we would like to have evolving social networks and the influence of key nodes; something akin to the family trees that some people have constructed for rock music, with influence possibly proxied by citations indicating the importance of branches. A halfway complete history of BE that would accomplish some such task is still wanting and is likely to be wanting for a while. It is not an easy task and probably takes more resources and time than a dissertation affords, even under the favorable conditions that Heukelom had and the time he gave his work to mature.

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Andreas Ortmann

UNSW Australia Business School,

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