Researchers challenging the rational individual model are applying findings from experimental psychology and behavioral economics to the problem of decision-making in a risky environment – a critical issue, particularly in the context of financial crises.
The inevitable irrationality
Is the irrational economist a new species of mad scientist? ? By this name the authors of this volume released in 2010 want us to understand that an economist who recognizes that economic agents do not follow the standards of rationality must himself renounce the neoclassical theory of economic rationality and therefore accept , that irrationality characterizes his own enterprise. This is a serious joke. The book contains a large number on this theme over the course of 29 contributions (but note the absence of contribution no. 13). Thomas Schelling’s note at the beginning of the book informs us that 80% of a sample of Americans over the age of 45 believe in miracles. To real miracles that would contradict the laws of nature. In the same vein, belief in the effectiveness of prayer or the veracity of oracles (those of Delphi or those of the rating agencies) is an apparent form of irrationality that is interesting, for a theorist of rationality. , to relate to the standard beliefs of agents about their environment. Schelling gives some analytical leads, but above all he sets the tone and the particular sense of volume. The 2008-2009 crisis, and its current extensions, have brought before our eyes the fact that the economy is a global and fragile human artifact, precisely because of its unpredictability and what we can call its cognitive opacity. Akerlof and Shiller (also authors of the recent Animal Spirits on fairly similar themes) recall the deep intuition of Keynes who compared the formation of prices on financial markets to the beauty contest. In a Keynesian beauty contest, it is not necessarily the most beautiful who wins, nor the one that the majority finds the most beautiful, but the one that the majority thinks that the majority finds the most beautiful. The problem is that financial predictions are most often considered (by the public, but often by the experts themselves) in the mode of weather forecasts, as if there were a future state of the market or economy to be predicted. anticipate which was independent of the beliefs of the economic agents themselves.
Kenneth Arrow’s article constitutes a remote response to these fundamental questions of Schelling and Akerlof and Shiller. In a lucid and masterful style, Arrow shows us that a well-known series of economic concepts (asymmetric information, general equilibrium under uncertainty, cost of information, etc.) is sufficient to account for periods of inefficiency and crisis of the financial capitalism of which he reminds us of some historical examples. On a theoretical level, there would therefore be no reason to feel helpless in the face of the succession of current crises. The irrational economist, as he is dramatized in this volume, will rather engage in an analysis of the behavior and psychological mechanisms of economic agents than in a distanced characterization of financial capitalism as fundamentally irrational or inefficient. The challenge of behavioral economics, for a good thirty years, has been to relate market dysfunctions to the existence of a very diverse range of cognitive biases and behavioral anomalies which result from them (Wikipedia lists 82) . The third part of the volume thus takes its source from a fresh discussion of our attitudes towards risk, the classic starting point of the behaviorist approach in economics, of which Slovic, one of the contributors, is a great representative.
The paradox of risk anticipation
The usual questions included here are entirely relevant in understanding the type of risk that characterizes ex ante the financial crisis of 2008-2009. It is no longer simply a question of knowing whether we could predict it, but of asking ourselves what probabilistic reasoning resources our sophisticated analysis grids or simply our ordinary psychology had at our disposal to anticipate this event. A usual distinction – between risk and ambiguity, that is to say between knowledge of the probability of occurrence of a future event and partial or complete ignorance of it – is ramified here over the course of three chapters (11, 12 and 14) and enriched with a notion, catastrophism, which, in very different styles, has flourished in recent literature on systemic crises which would affect our societies, in Jean-Pierre Dupuy or Nassim Taleb. In the first case, it is the idea that an event which seemed improbable (or incalculable) to us ex ante must, once it has taken place, be recaptured in the objective thread of causalities and probabilities post hoc ; in the second case, it is the theme, now well popularized, of the neglect of small probabilities in favor of a purely emotional relationship with these very unlikely events.
This deepening of the frameworks for analyzing the possibility of crises and catastrophes gives rise to two additional sets of contributions: some asking to what extent we need to reform our models and our conception of rationality in economics (part 2) and the others proposing to apply the theoretical intuitions identified in part 3 to the management and insurance of extreme financial, but also environmental, technological and humanitarian risks (parts 4 and 5). These final parts are the best developed, the richest and the most precise of the work. This is due to a circumstantial factor: the contributors all pay tribute to the economist Howard Kunreuther, co-director of the Wharton Risk Management and Decision Processes, one of the analysts most sought after internationally to deal with so-called events. LP–HC (low probability-high consequence). An interesting dilemma is raised several times: if we seek to make risk managers and insurers aware of this type of event which, due to their very low probability, is not the center of their attention, there is no risk are we not diverting them from more ordinary risks and generating paradoxical risk management? ? The seemingly trivial problem posed here is the one whose clarification earned a Nobel Prize, in 2004, for Edward Prescott and Finn Kydland (whose absence in this volume which invited three other recipients is regrettable): even if agreement on an objective social function is reached and decision-makers correctly anticipate the magnitude and timing of the consequences of their decisions, this correct assessment cannot lead to the optimization of the objective social function taken for reference. In other words, the work of Prescott and Kydland has revealed a fundamental paradox of rational expectations within the analytical framework of “ new classical economy » (Lucas, Sargent, Wallace, etc.) which consists of saying that crises and cyclical fluctuations are optimal responses to exogenous shocks and therefore removing all effectiveness and legitimacy from public intervention in economic activity.
Is an overhaul of economic rationality absolutely necessary? ?
We can regret that no contribution in the volume refers to this fundamental paradox of neoclassical thought, because it is its taking into account, precisely in the context of the anticipation of major economic risks, which justifies our seeking to renew or turn away from the classic theory of rational anticipations, which is what the second part of the volume seeks to encourage us to do. This part is the most crucial, but also the weakest, of the book. Its weakness lies in the fact that the contributions that psychology or neuroscience are supposed to make (chapters 9 and 10, one of which by one of the most active promoters of neuroeconomics, Colin Camerer) to the renewal of the frameworks for interpreting rationality human beings are here insufficiently intrinsically motivated. Is it enough to account for the cerebral activities linked to decision-making in different risk contexts to i) have truly enriched and modified the classic theory of rational decision, and ii) provide the material with a view to better (and not subject to to the aforementioned paradox) behavioral expectations ? But this is the most crucial part, because the “ irrational economist » is indeed the one which must stand out from the classic analytical frameworks in order to bring together parts of economic science that are not easy to link together in an epistemologically coherent manner (at the extremes: systemic analysis and macroeconomic of societal risks and psychological and biological questions on the formation of preferences). However, this coherence can only come from a full critical assessment of the limits of the classical approach. As a result, we come back to what is, in our opinion, the best contribution of the volume, that of Arrow, who, somewhat contrary to the main message of the book in favor of the contributions of behavioral economics to account for extreme economic phenomena still ongoing since the publication of the book, wonders “ innocently » if crises do not arise because economic agents are not sufficiently financially incentivized to minimize social risks with regard to short-term individual benefits. There is perhaps not yet sufficient reason, after reading the book which is to date undoubtedly the best attempt at interpreting global risks in behavioral terms, to depart from a definition of economic rationality in terms of sensitivity to monetary incentives.