A New Approach: Difficulties when Modeling Behavioral Economics


#1

Perfect information, forward-looking reasoning and rationality are some of the main assumptions used in the general equilibrium model which lead to interesting and eye-opening results. But we have to look at other alternatives in which humans can´t be described only by specific rules, it is difficult to model their complex interactions. The assumptions used in traditional models are supposed to allow an approximation of reality but then came the behavioral economics to see if human activity diverges from those models and the recent work of Richard Thaler, which just won the Nobel Prize on Economics, proposes an alternative to consider.

There are concerns about things such as fairness that can be as important in human decision as rationality, and it is a challenge to present this type of behaviors into a model. The player considers what is socially acceptable when making decisions, he adjusts his ideas about what sort of behavior counts as fair. Behavioral decisions shift depending on the situation, and each different setting leads to a different behavior. According to each scenario, people judge what they should and should not do. It is a game in which every player is constantly updating his ideas. This is just something to keep in mind as a new approach on recent economical modeling and analysis.

Source:

R.A… (2017). Richard Thaler´s work demonstrates why economics is hard. 18 Febrero 2018, de The Economist Sitio web: https://www.economist.com/blogs/freeexchange/2017/10/nobel-prize-economic-sciences


#2

Hi Karla,

As you, I have also questioned myself how useful the General Equilibrium model is nowadays, or if it´s just an abstraction detached from actual reality.
As we have seen in class, the First Welfare Theorem, which stablishes that competitive markets tend toward an efficient allocation of resources, may be laying over really strong assumptions that do not happen in real world. Moreover this theorem supports the idea that leaving the markets alone will end in a Pareto efficient outcome. Pareto efficient just means that no one can be made better off without making someone else worse off; but, is that what we desire to achieve? In fact, it may result in an outcome that is not fair at all.

On the other hand, I understand and think that models do not need to be real, their main function is to be practical and helpful. For example, the map of the subway line inside the subway is just a straight line and does not show the curves and crossings of the road, however it is useful enough to allows us to get from one place to another. The FWT is a mathematical model and as many of these models, it is useful within narrow ranges. As a policy maker the model would be helpful in studying effects of policy changes. However we must be careful because, economic policy has a direct impact on social and political issues in our daily life.

For this I think that General Equilibrium models should not be left aside, but as you said it must be accompanied with some other theories like Behavioral Economics, which reflect better human behavior.


#3

Hi Karla,
I think The General Equilibrium model is just an abstraction from reality, like all the others models.
As we see day to day, we try to use mathematics to relate and explain each fact. The human being has tried since the begin of times to understand and advance the results of each event. So each model is just an approximation of what we understand or what we think we understand.
As you say , there are concerns about things such as fairness that can be as important in human decision as rationality, and it is a challenge to present this type of behaviors into a model. Yes! obviously it’s a challenge, but if you do it as good as you can, it can be the most approximate model or at least a step to a new kind of models. In this game, as you call it, we must try to make the models more dynamic to fit different behaviors.
As Ana Paula says models do not need to be real, their main function is to be practical and helpful.