Social Sciences / Behavioral Economics
Parent article: Social Sciences: Irrationality Is Not an Argument for Planners
Subjective value
Principle that the value of a good is not a property of the good itself but of the relationship between the good, the individual evaluating it, and the context of that evaluation. Origin: Carl Menger (1871). Pillar of Austrian economics. Necessary condition for Mises’ calculation argument: if value were objective, it could in principle be calculated; because it is subjective, it can only be revealed through voluntary exchange.
Related: ordinal value, preferences, subjective utility, valuation Cross-references: Praxeology / Austrian Political Economy Key work: Menger, C. (1871/1950). Principles of Economics. Free Press.
Prospect Theory (Kahneman & Tversky, 1979)
Theory of behavior under risk and uncertainty describing how people evaluate outcomes relative to a reference point, with greater sensitivity to losses than to gains of equal magnitude. Violates expected utility theory. Nobel Prize in Economics 2002 (Kahneman). A robust descriptive finding; its normative policy implications are contestable.
Related: loss aversion, endowment effect, reference point, heuristics Cross-references: none direct Key work: Kahneman, D., & Tversky, A. (1979). Prospect theory. Econometrica, 47(2), 263–292.
Endowment effect
Systematic tendency to value an object higher simply by owning it, compared with the price that would be paid to acquire the same object. Documented by Kahneman, Knetsch, and Thaler (1990). Violates Walrasian equivalence between willingness to pay and willingness to accept. Not necessarily irrational in a praxeological sense: it may be consistent with stable ordinal preferences over ownership states.
Related: loss aversion, Prospect Theory, status quo bias Cross-references: none direct Key work: Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1990). Experimental tests of the endowment effect. Journal of Political Economy, 98(6), 1325–1348.
Nudge (Thaler & Sunstein, 2008)
Intervention in choice architecture that alters predictable behavior without prohibiting options or materially changing economic incentives. From an Austrian standpoint: soft paternalism with the same epistemological problem as hard paternalism. The nudge designer assumes knowledge of what the best outcome is for individuals whose preferences they cannot fully access.
Related: choice architecture, libertarian paternalism, default, opt-in/opt-out Cross-references: Praxeology / Austrian Political Economy Key work: Thaler, R. H., & Sunstein, C. R. (2008). Nudge. Yale University Press.
Public choice (Buchanan & Tullock, 1962)
Application of economic methods and assumptions to the analysis of political and institutional behavior. Result: politicians, bureaucrats, and regulators respond to personal and institutional incentives, not to aggregate social welfare. Direct critique of the benevolent planner assumption underlying behavioral policy proposals.
Related: rent-seeking, regulatory capture, government failure, institutional incentives Cross-references: Praxeology / Austrian Political Economy Key work: Buchanan, J. M., & Tullock, G. (1962). The Calculus of Consent. University of Michigan Press.
Constitutional economics (Buchanan)
Branch of political economy studying the rules of the game rather than outcomes within the game. Core argument: the outcomes of the political process depend fundamentally on the constitutional rules under which it operates, more than on the intentions of decision-makers within that process. Implication for behavioral policy: the design of choice architecture should be subject to constitutional constraints, not left to expert discretion.
Related: public choice, social contract, rules vs. discretion Cross-references: Praxeology / Austrian Political Economy Key work: Buchanan, J. M. (1990). The Economics and the Ethics of Constitutional Order. University of Michigan Press.
References
Buchanan, J. M., & Tullock, G. (1962). The Calculus of Consent. University of Michigan Press.
Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1990). Experimental tests of the endowment effect and the Coase theorem. Journal of Political Economy, 98(6), 1325–1348.
Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263–292.
Menger, C. (1871/1950). Principles of Economics. Free Press.
Mises, L. von (1949). Human Action: A Treatise on Economics. Yale University Press.
Thaler, R. H., & Sunstein, C. R. (2008). Nudge. Yale University Press.