Must-Read: Noah Smith: Defending Thaler from the guerrilla resistance

Must-Read: The invisible hand wavers are out in force this week!

Noah Smith: Defending Thaler from the guerrilla resistance: “This… by Kevin Bryan… [who] instead of explaining Thaler’s research, Kevin decided to challenge it, in a rather dismissive manner…

…These criticisms… don’t really hit the mark…. First, a random weird thing. Kevin writes: “Much of my skepticism is similar to how Fama thinks about behavioral finance: ‘I’ve always said they are very good at describing how individual behavior departs from rationality. That branch of it has been incredibly useful. It’s the leap from there to what it implies about market pricing where the claims are not so well-documented in terms of empirical evidence.’”… It’s a very odd quote. Behavioral finance has been very good at documenting asset price anomalies…. This is what Shiller got the Nobel for in 2013…. It’s what Thaler himself is most famous for within the finance field…. In terms of empirical evidence, behavioral finance is pretty solid….

The dismissal that Thaler refers to as “the invisible hand wave”… a claim that markets have emergent properties that make a bunch of not-quite-rational agents behave like a group of complete-rational agents. The justifications typically given for this assumption – for example, the idea that irrational people will be competed out of the market – are typically vague and unsupported. In fact, it’s not hard at all to write down a model where this doesn’t happen – for example, the noise trader model of DeLong et al. But for some reason, some economists have very strong priors that nothing of this sort goes on in the real world, and that the emergent properties of markets approximate individual rationality….

Ethical concerns: Kevin, like many critics of Thalerian behavioral economics, raises ethical concerns about the practice of “nudging”…. There are, indeed, very real problems with behavioral welfare economics. But the same is true of standard welfare economics…. For some reason Kevin chooses to raise ethical concerns only for behavioral econ. Do we see Kevin worrying about whether efficient contracts will lead to inequality that’s unacceptable from a welfare perspective? No…. Worried about paternalism…. Cavalier about inequality….

The invisible hand-wave, again…. This argument makes little sense to me. Most people aren’t Michael Jordan or Einstein. And those people surely didn’t compete all the other basketball players and physicists out of the market. Why does the existence of a few perfectly rational people mean that nudges don’t matter in aggregate? Also, why should we assume that non-Michael-Jordans can quickly or completely learn heuristics that make nudges unnecessary? If that were true, why would players even have coaches? It seems like another case of the invisible hand wave…. Assuming that a market for third-party advice will take care of behavioral problems seems like both a big leap and a mistake….

Kevin’s attacks on Thaler’s research paradigm pretty much uniformly miss the mark…. I half suspect that Kevin… is playing devil’s advocate… taking cheap shots at behaviorism simply because it’s fun. This guerrilla resistance is more like paintball.


Brad DeLong


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