Economists Behaving Irrationally (or Economists Gone Wild!)

Brad de Long considers it "the greatest improvement in economics in my lifetime."

He is referring to the Journal of Economic Perspectives' recent decision to allow open access to its articles on the web. I tend to agree with him on this and hope that other serious academic journals follow suit.

Anyway, I took the opportunity to scan the contents of its archives to find articles that discuss a relatively new perspective in the economics profession, and that is how individuals or agents do not act rationally most of the time.

I came upon this one by Liran Einav and Leeat Yariv entitled What's in a surname? The effects of surname initials on academic success. It finds that among leading economics departments in the US, the supposed pre-eminent exemplars of rational decision-making,

Faculty with earlier surname initials are significantly more likely to receive tenure (...) are significantly more likely to become fellows of the Econometric Society, and, to a lesser extent, are more likely to receive the Clark Medal and the Nobel Prize. These statistically significant differences remain the same even after we control for country of origin, ethnicity, religion or departmental fixed effects.

There you have it, evidence that economists behave irrationally. The authors go on to state

We suspect the “alphabetical discrimination” reported in this paper is linked to the norm in the economics profession prescribing alphabetical ordering of credits on coauthored publications. As a test, we replicate our analysis for faculty in the top 35 U.S. psychology departments, for which coauthorships are not normatively ordered alphabetically. We find no relationship between alphabetical placement and tenure status in psychology.

Based on this research, not only do economists behave irrationally, their actions are based on others behaving the same way(!) as shown by their careful selection of co-authors and their increasing unwillingness to follow the alphabetical ordering norm. 

I suppose the core principle of economics about people responding to incentives still holds; whether such behaviour is based on rational or irrational norms is quite another thing altogether.

Mapping Happiness

This intriguing diagram was taken from a publication of the World Values Survey Association, a global network of social scientists committed to cross-cultural mapping of societies in all of the inhabited continents of the world.


What is striking about it is that after conducting interviews with representatives of 80 societies from 1981 to 2007, each national sample consisting of 1,000 participants, covering 85 percent of the world's population, the results remain stable over this time (i.e. movements have been slow).

You can conclude that the results confirm the importance of two things:

Institutions. The new institutional economics (NIE) school tells us that individuals and groups in society structure and organize their dealings in a manner that reduces costs to them (the so called transaction cost approach). Social norms and expectations (a.k.a instituions) are a way of enforcing stability and regularity. Because these arrangements suit the interests of both parties transacting, they are expected to endure much longer than any formal legal or political dispensation.

Inertia or status quo bias. Behavioral science tells us that much as we would like to think of ourselves as rational agents, our behavior is affected by what we perceive others think and expect of us. Thus, we might persist in customary practices even when the original incentive for it has gone. This makes the case for institutional change even more difficult to make.

Difficult perhaps, but not impossible nor uncommon. One key finding of the WVS is that

since 1981, economic development, democratization, and rising social tolerance have increased the extent to which people perceive that they have free choice, which in turn has led to higher levels of happiness around the world, as the "human development" model suggests.