The case of mindless economics

The Case for Mindless Economics†

Faruk Gul and Wolfgang Pesendorfer Princeton University

November 2005 Abstract Neuroeconomics proposes radical changes in the methods of economics. This essay discusses the proposed changes in methodology, together with the the neuroeconomic critique of standard economics. We do not assess the contributions or promise of neuroeconomic research. Rather, weoffer a response to the neuroeconomic critique of standard economics.

† This research was supported by grants from the National Science Foundation. We thank Drew Fudenberg and Philipp Sadowski for helpful comments and suggestions.

1. Introduction
Neuroeconomics proposes radical changes in the methods of economics. This essay discusses the proposed changes in methodology, together with the theneuroeconomic critique of standard economics. Our definition of neuroeconomics includes research that makes no specific reference to neuroscience and is traditionally referred to as psychology and economics. We identify neuroeconomics as research that implicitly or explicitly makes either of the following two claims: Assertion I: Psychological and physiological evidence (such as descriptions ofhedonic

states and brain processes) are directly relevant to economic theories. In particular, they can be used to support or reject economic models or even economic methodology. Assertion II: What makes individuals happy (‘true utility’) differs from what they

choose. Economic welfare analysis should use true utility rather than the utilities governing choice (‘choice utility’). Neuroeconomicsgoes beyond the common practice of economists to use psychological insights as inspiration for economic modeling or to take into account experimental evidence that challenges behavioral assumptions of economic models. Neuroeconomics appeals directly to the neuroscience evidence to reject standard economic models or to question economic constructs. Camerer, Loewenstein and Prelec (2005) (henceforthCLP (2005)) express the neuroeconomics critique as follows: “First, we show that neuroscience findings raise questions about the usefulness of some of the most common constructs that economists commonly use, such as risk aversion, time preference, and altruism.” (p. 31-32) In section 5 of this essay, we argue that Assertion I of the neuroeconomic critique misunderstands economic methodology andunderestimates the flexibility of standard models. Economics and psychology address different questions, utilize different abstractions, and address different types of empirical evidence. Neuroscience evidence cannot refute economic models because the latter make no assumptions and draw no conclusions about the physiology of the brain. Conversely, brain science cannot revolutionize economics because 1the latter has no vehicle for addressing the concerns of economics. We also argue that the methods of standard economics are much more flexible than it is assumed in the neuroeconomics critique and illustrate this with examples of how standard economics deals with inconsistent preferences, mistakes, and biases. Neuroeconomists import the questions and abstractions of psychology and re-interpreteconomic models as if their purpose were to address those questions. The standard economic model of choice is treated as a model of the brain and found to be inadequate. Either economics is treated as amateur brain science and rejected as such or brain evidence is treated as economic evidence to reject economic models. Kahneman (1994) asserts that subjective states and hedonic utility are“legitimate topics of study”. This may be true, but such states and utilities are not useful for calibrating and testing standard economic models. Discussions of hedonic experiences play no role in standard economic analysis because economics makes no predictions about them and has no data to test such prediction. Economists also lack the means for integrating measurement of hedonic utility with...