Economics=Psychology+Counterfactual Models
Channel: Prof. Sam Vaknin
Date: 2023-03-02

Economics - to the great dismay of economists - is merely a branch of psychology. It deals with individual behaviour and with mass behaviour. 

Many of its practitioners seek to disguise its nature as a social science by applying complex mathematics where common sense and direct experimentation would have yielded far better results. 

The outcome is an embarrassing divorce between economic theory and its subjects.

The economic actor is assumed to be constantly engaged in the rational pursuit of self interest. This is not a realistic model - merely a useful (and flattering) approximation. 

According to this latter day - rational - version of the dismal science, people refrain from repeating their mistakes systematically. They seek to optimize their preferences. Altruism can be such a preference, as well.

We like to believe that we are rational. Such self-perception is ego-syntonic. Yet the truth is that many people are non-rational or only nearly rational in certain situations. And the definition of "self-interest" as the pursuit of the fulfillment of preferences is a tautology.

The theory fails to predict important phenomena such as "strong reciprocity": the propensity to "irrationally" sacrifice resources to reward forthcoming collaborators and punish free-riders. It even fails to account for simpler forms of apparent selflessness, such as reciprocal altruism (motivated by hopes of reciprocal benevolent treatment in the future).

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