One Equation to Rule Them All? Experimental Economics and the Quest for Unity of Human Behavioural Science Berly Martawardaya Universita’ di Siena (Italy) World Meeting of Economic Science Association (ESA) 2007

Sociolog y Biology Psychology Cognitive Science Economics Politics Ethics Philosophy

Why can’t we get along? Distinct and incompatible model of human behavior (Gintis, 2006)

The Family of Science (Britannica) Sociology Science of society, social institutions, and social relationships, and specifically the systematic study of the development, structure, interaction, and collective behaviour of organized human groups. Antropology Science of humanity in aspects ranging from the biology and evolutionary history of Homo sapiens to the features of society and culture that decisively distinguish humans from other animal species.

The Family of Science (Britannica) Cognitive Science studies the cognitive processes of humans in terms of the manipulation of symbols using computational rules. Psychology studies mental processes and behaviour in humans and other animals. focuses on both individual and group behaviour. Economics studies the consequences of choices made concerning scarce productive resources. How individuals and societies choose to employ those resources: what goods and services will be produced, how they will be produced, and how they will be distributed among the members of society

Deductive vs inductive Aristotle’s deduction All men are mortal - universal rule Socrates is a man - case  ergo Socrates is mortal - result The syllogism – moving from the universal to the particular But how to get to universal?

Induction Through the Ages Aristotle: from the particular to the universal explaining observed facts Hume: reasoning about unobserved facts Jevons: the inverse of deduction Carnap: estimating the logical strength between premises and conclusion Peirce: experimental research

What is experiments ? “Experiment, An action or operation undertaken in order to discover something unknown, to test a hypothesis or establish or illustrate some known truth” (Oxford English Dictionary)

No experiment…. “ Economics… can not perform the controlled experiments of chemist or biologist because (it) can not easily control other important factors. Like astronomers or meteorologist, economist must be content largely to observe” (Samuelson and Nordhaus, 1985)

…or experiment? “Economics has also been regarded as a non-experimental science, where researchers – as in astronomy or meteorology – have had to rely exclusively on field data, that is, direct observations of the real world. During the last two decades, however, these views have undergone a transformation. Controlled laboratory experiments have emerged as a vital component of economic research and, in certain instances, experimental results have shown that basic postulates in economic theory should be modified.” (The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel 2002 for Daniel Kahnemann & Vernon L. Smith)  From Anomalies of Theory to Theory of Anomalies

Cost and External Validity Cost of setting up experiment - not all economic topic can be experimented - number of people, stake involved, topics, etc - co-exist with modelling & simulation External validity “..much of economic theory can be called ‘ ecclesiastical theory.’ It is accepted (or rejected) on the basis of authority, tradition or opinion about assumption rather than surviving a rigourous falsification process that can be replicated” Vernon Smith (1987) If you have to experiment, experiment often!

Neoclassic assumptions Behavioral Economics’ Generalization Outcome regarding preferences Process regarding preferences Self regarding preferences Other regarding preferences (other people, community, etc.) Exogenous preferences Endogenous Preferences (constructed, discovered, learned or adapted) Preferences is stablePreferences changes over time Reference/context independent Reference/context dependent Source: Rabin (2004) and Gintis (1998)

Sub-concious decisions Lakoff and Johnson (1999): The embodied mind Biological Biological process and neuronomics (Zak et al, 2005), (Kosfeld et al 2005) Environment Human as part of ecosystem Bellemare and Shearer (2007) We should collaborate with marketing scientist

Selfish, social and sub-concious The 3 S as the building block of human behaviour Complex and interelated relations Will there be one equation? What about risk/uncertainty & intertemporal decision?

Do we have free will? “… The object of study in social science is our own selves, and in order to be science, social science must look for eternal laws that apply to humanity. But stripped of the freedom to act, and subject to such laws, there is no humanity.” Sunder (2006).

Know Thyself