Tuesday, August 14, 2007

Economics and psychology

Chris Dillow is enlightening the pages of the Times today:

Economists are everywhere. Steve Levitt, Tim Harford and Steven Landsburg use newspaper columns and best-selling books to show how economics can account for why drug dealers live with their mums, why you can’t find space to park, why school teachers cheat, why people share umbrellas and why sexually transmitted diseases are so rife. Simple economics, it seems, can explain everything.
Everything, that is, except the economy.

It’s common to hear people talk (often in relation to the names Chris mentions) about how we can apply economics to other walks of life. I think this gets things the wrong way round.

Economics, to the extent that it’s the study of financial decisions and actions, is actually a subdiscipline of psychology. As Stephen Dubner, Levitt’s collaborator, says: “It's about human behaviour, and about what incentives drive people.”

It just so happens that a lot of mathematically rigorous, data-driven work has gone on in economics that’s then been tested in real business and policy decisions – and I daresay the field has been better funded as well. This means that economics has often come up with ‘harder’ findings than has more traditional social psychology, say (it’s also come up with some dross, but never mind that).

But the idea of extending economics to other areas of human behaviour shouldn’t be taken to mean that psychology is being swallowed up by economics; it simply reflects the fact that economics is part of psychology and that many of the same principles and methods can be applied more broadly.

There is, of course, a risk of overgeneralisation; in particular, the Homo economicus view of humans, as wanting to maximise material wellbeing and able to logically process all available information to that end, is going to lead you seriously astray if you want to understand and predict what people do.

This applies even in economic contexts, and indeed the academic influence also flows from social and cognitive psychology into the field of behavioural economics.

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