About 50 years ago, Daniel Kahneman and Amos Tversky started to take on the neoclassical doctrine of rational, self-interested behaviour. It turned out to be a destructive process. The two psychologists showed how humans systematically behave differently than homo economicus1 would in a range of situations.
Studying economic theory often feels like looking at a very different world than the one in which we live every day. By using concepts likes rational choice theory or utility maximising agents, traditional economic models certainly gain in tractability and sometimes in insightfulness. Nevertheless, try explaining to a friend how he should behave to maximise his utility when choosing beers at the supermarket, or how rationality requires him to quit smoking. You will quickly understand the gap between economic theory and real world economic agents. Not that it is useless, of course, but it lacks in realism. The models assumptions and their results have digressed from the concrete actions and decisions taken by consumers and firms. Even for us, studying economics everyday, it is uncertain whether our courses help us to make better decisions.
We have all seen it: Someone asks what you study and you see their eyes glaze over in boredom, as you try to convince them that economics is cool. For most non-economists, the subject is just a bunch of numbers, equations, and spreadsheets with some fuzzy link to business, profits, bankers, and other evil things. They never seem to understand that, at its heart, economics is about how society works — and ultimately how we human beings work.
What is rationality? Or, more concretely, what is a rational agent? In economic theory, a rational agent tends to always make the best possible choice based on his or her own interests. Rational agents maximize their utility given the preferences, constraints, perceived opportunities, and available information. The rationality hypothesis has its own limits, though. Humans are not clear-minded. Our emotional nature leads to inconsistency in
According to an analysis by The Economist on keywords in working-paper abstracts by the National Bureau of Economic Research, big data and machine learning have become the latest fad among economists.
In the words of Jason Furman, the Chairman of the Council of Economic Advisors of the Obama administration: “I want to start with the biggest worry I have about [AI]: that we do not have enough of AI. Our first, second and third reactions to just about any innovation should be to cheer it—and ask how we get more of it.”