Economics vs Psychology

Following on from Jason Soon’s Catallaxy post about what economists can learn from evolutionary theory, I thought I should highlight economist Ed Glaeser’s take on the interaction between economics and psychology, which is more critical of psychology than most behavioural economics has tended to be. Some quotes over the fold.

Economics is neither so weak nor psychology so strong that economists should content themselves with applying psychology to economic problems. Economics has as much to give to psychology as psychology has given to economics.

If anything, situationalism creates more of a problem for psychology than for economics. In the real world, situations are man-made. To understand heterogeneity across time and space, psychologists need theories that explain how exogenous variables shift the supply of cues, framing and other situational factors. For example, psychology tells us that people form beliefs in large part by listening to people around them, so it isn’t a surprise that cognitive errors can propagate and persist. But psychology doesn’t help us to understand the exogenous factors that lead to different errors in different times and places. No laboratory based science is going to explain why anti-Semitism exploded in 19th century Germany but not in 19th century Italy. If we combine economic insights about the understanding of the supply of influence and psychological insights about the impact of that influence, then we have a chance to understand equilibrium outcomes. For example, social psychologists document that people respond angrily to attacks against themselves and to stories about attacks against seemingly innocent victims. These stories can produce hate. Economics helps us to craft an equilibrium model of supply of hate-fulfilling stories. An economic model of hate (as in Glaeser, 2002) can use the economic focus on incentives and equilibrium to create predictions about where we should expect to see outbreaks of hatred.

But while the bulk of behavioral economics has so far focused on the gains to economics from incorporating some psychology, there are also large gains to psychology from incorporating some economics, especially when it comes to explaining large-scale phenomena. Society-wide psychological phenomena such as prejudice and nationalism cannot be understood without recognizing that they come about through the interaction of strategic actors who push beliefs on the citizenry as a whole. In a sense, there is a supply of beliefs that interacts with consumers who essentially “demand” these thoughts. To understand the equilibrium of the market for beliefs, and to understand differences across societies, the traditional economic focus on incentives and no-arbitrage equilibrium seems to offer promise.

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