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Thursday, January 12, 2012

The behavioural economist's dilemma: induction versus deduction

Worthwhile Canadian Initiative: The behavioural economist's dilemma: induction versus deduction:


Economics, he said, is basically a deductive discipline.�Psychology, on the other hand, is inductive.�

It's a caricature, a gross over-simplification. But it has an element of truth.

Economists like to begin with a general model, work out its implications, and then go to the data to test the theory. Yes, there are applied economists who spend their lives trying to find out facts about the world. But facts in and of themselves are uninteresting unless they illuminate economists' view of the world, and can be explained in economic language.

Psychologists begin by observing people's behaviour, looking for generalizable patterns. For example, if people are observed acting as if they are averse to losses, psychologists infer that loss aversion exists. Yes, psychologists have conceptual explanatory frameworks, such as prospect theory, to explain such phenomena,but these theories are not the elegant mathematical creations favoured by economists. And where is the status and prestige? �Look at the psychology journal rankings. There isn't a top-ranked�journal with "theory" in the title.

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