The emerging research programme of ‘behavioural economics’ draws on ideas from
psychology to explain economic behaviour. A new study by Professors Luigino Bruni and
Robert Sugden, published in the January 2007 Economic Journal, shows how this may
well be returning the discipline to its late nineteenth century roots in work based on
assumptions about the psychology of pleasure and pain – and potentially turning away from
a hundred years of work based on the assumption of human rationality.
For most of the twentieth century, economic theory has been built on the assumption that
individuals make rational choices. In recent times, many of the theoretical developments in
which economists have taken greatest pride have involved the extension of rational choice
modelling to new areas, such as strategic interaction, political decision-making and law.
When new ideas have come from outside the rational choice framework, as in the case of
John Maynard Keynes’s macroeconomic theory, the economics profession has devoted its
energies to constructing what are called ‘micro-foundations’ – that is, reconstructing the
theory in question so that it can be shown to derive from assumptions about rational choice.
One of the most remarkable developments in economics in the last few decades has been
an apparent reversal of this trend, in the form of behavioural economics. Behavioural
economists take pride in grounding their explanations of economic phenomena on
hypotheses about how human beings really think and act, rather than on abstract
assumptions about rationality. Like psychologists, they use controlled experiments to
investigate human behaviour.
According to behavioural economists, many cherished economic theories do not perform
particularly well in experimental tests, and revisions are required. Naturally, these claims
are provoking intense controversy in the economics profession. Bruni, a historian of
economic thought, and Sugden, an economic theorist and behavioural economist, review
this controversy and put it into historical perspective.
They show that the idea that economics should be based on assumptions about rationality
took hold only in the early years of the twentieth century. The ‘neoclassical’ economic
theory of the late nineteenth century, as presented by writers such as Stanley Jevons and
Francis Edgeworth, was based on assumptions about the psychology of pleasure and pain.
The movement to reconfigure economics into rational choice theory, led by the Italian
economist Vilfredo Pareto, was highly controversial at the time. Looking back, however,
most economists have thought that Pareto was on the side of progress: his ideas (it is said)
paved the way for later achievements of mathematical economic theory, while his
opponents were clinging to redundant and unscientific assumptions.
Bruni and Sugden offer a different perspective. They show that the economics of Jevons
and Edgeworth was grounded in what were then recent findings of the emerging research
field of experimental psychology. The ideas that these economists took from psychology
were the products of a scientific research programme that, in its essentials, has stood the
test of time.
By following Pareto, twentieth-century economists chose not to follow a path which might
have led to something much more like behavioural economics: what the researchers call
the ‘road not taken’.
In justifying the reconstruction of economics as rational choice theory, Pareto used many of
the arguments that are now used by opponents of behavioural economics. Bruni and
Sugden show that these arguments, even if valid, justify the use of rational choice
assumptions only within a very narrow range of economic environments – essentially, those
in which individuals face the same choice problems repeatedly.
Thus, if economics is to continue to characterise itself as the science of rational choice, it
may have to retreat from many of the areas in which economists have claimed expertise.
The development of behavioural economics may be calling the bluff of several generations
of rational choice economists.
ENDS
Notes for editors: ‘The Road Not Taken: How Psychology was Removed from Economics,
and How it Might be Brought Back’ by Luigino Bruni and Robert Sugden is published in the
January 2007 issue of the Economic Journal.
Luigino Bruni is at the University of Milan-Bicocca. Robert Sugden is at the University of
East Anglia.
For further information: contact on Robert Sugden +44-1603-593423 (email:
r.sugden@uea.ac.uk); or Romesh Vaitilingam on +44-7768-661095 (email:
romesh@compuserve.com).