1.6.03

HETERODOX ECONOMICS. Thought-provoking Winter Speak post on the differences between conventional (read full-information) and behavioral (read limited-information) economics. I'm going to leave aside the markets-vs.-philosopher kings and focus on this: "Behavioral ec. shows that people don't think about things in the right way, and this leads them to make suboptimal decisions. Economic markets anticipate people making the optimal decisions, which leads to them producing the absolute best possible outcomes. People who dislike economics (and there are many) bring these two facts together and argue that this means markets hardly ever produce the best outcomes." My sense is that even this characterization is too strong, but I'm not yet comfortable enough with Liapunov's second method to prove it. There is probably enough compactness in the strategy sets of people acting with limited information (that they can update ONLY by trading) and enough rationality in the updating to produce meaningful decentralization results with optimality properties, which would annoy the abusers of behavioral economics greatly, not to mention the effect that such an approach would have on the Austrians.

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