Earl – Comparing the approaches of indifference curves and behavioural economics.
Peter Earl on comparing the approaches of indifference curves and behavioural economics
The following extract is from p.28 of Earl, P. E. (1995). Microeconomics for business and marketing: lectures, cases, and worked essays. Aldershot, Hants, England: E. Elgar.Note that recent developments in behavioural economics differ somewhat from the earlier ones described below (see also Ed. note at the end of this commentary):
Two contrasting ways of looking at consumer behaviour are considered in this book. One of these is indifference analysis, part of what is known as the ‘neoclassical’ or ‘general equilibrium’ research programme in economics. This was developed at the London School of Economics in the 1930s by John Hicks, who was later awarded the Nobel Prize in Economics, and Roy Allen (Hicks, 1939; Hicks and Allen, 1934). This is a highly deductive approach to economics: a series of assumptive building blocks (‘axioms’) are selected; the logical implications of accepting these assumptions are then explored, with a view to discovering testable predictions. Overriding the process of selecting axioms is Occam’s Razor—the principle that the fewest possible assumptions are to be made in explaining a particular phenomenon—so in Chapter 3 we begin by exploring the ways in which Hicks and Allen sought to build models of the consumer that were analytically rigorous by keeping them free of any unnecessary baggage that might get in the way, particularly any inputs from psychology. The Hicksian model may seem to entail a long list of simplifying assumptions, but the list would be far longer if complex theories and empirical generalizations from outside economics had been used as foundations.
The other approach comes from a very different research programme known as behavioural economics. This was pioneered in the 1940s and 1950s by another Nobel prizewinner, Herbert Simon of Carnegie-Mellon University in Pittsburgh (Simon, 1957, 1959). Simon’s approach mixes economics with other disciplines, particularly psychology and management science. It gets its ‘behavioural’ tag from working on the principle that, before attempting to construct simplifying models of choice, the analyst should study the kinds of problems that actually confront decision-makers and how they actually behave in coping with them. This is quite close to what philosophers of science call an inductive method of theorizing, in which one first gathers a limited set of facts and then constructs more generally applicable theories in the light of them (for example, if a sample of smokers has a higher death-rate from lung cancer than does a sample of non-smokers, then it might be inferred that smoking increases the risk of lung cancer in the population at large). However, there is no such thing as theorizing without having some kind of prior beliefs about cause and effect: behavioural theorists, like any others, have to hypothesize at the outset about which facts they should gather and which potential relationships they should ignore. In contrast to the fascination of Hicks and Allen with equilibrium states that consumers might be thought of as arriving at, behavioural theorists see choice as an ongoing process of problem-solving during which consumers’ views of the world and of their wants may undergo considerable evolution.
[Ed. note: Section 2.3 of this source compares decision making according to neoclassical and behavioural approaches. Peter Earl also recommends the following articles for their descriptions of changes in behavioural economics:
- Sent, E.-M. (2004). Behavioral Economics: How Psychology Made Its (Limited) Way Back Into Economics. History of Political Economy, 36(4), 735-760.
- Earl, P. E., & Peng, T.-C. (2012). Brands of Economics and the Trojan Horse of Pluralism. Review of Political Economy, 24(3), 451-467]
Last updated 8 September 2014