PALO ALTO - Amos Tversky was the Stanford University psychologist who debunked the idea that economics was a 'science' in the 1950's. He showed that most popular theories of economics being taught in the world's universities were not based on scientific principles, at all. Instead,'economic science' is a type of ethical philosophy. Economist's reasoning was faulty because their theories were built on a series of false assertions about human behavior that contaminated all economic thinking, planning, valuations, and forecasts.

Therefore, 'economics' as a 'social science' method for determining public policy, taxation levels, social programs and in other forms of problem solving is unreliable.

Economits honestly fail to recognize the presence of bias in their own assumptions. Yet, everyone else knows that no two economists agree. The same cannot be said of scientists, can it?

The main problem with economic reasoning, Tversky thought, is that it is characteristically unscientific in its approach to gathering information and giving weight to it. For example, neo-classical economics assumes all human decision making is based on positive, or individual higher-order rational choice as opposed to social values, popular ideas, normative(moral) judgment, and lower-order value preferences.

Tversky's work focused on how people are subconsciously influenced in making individual and group economic choices. People are very susceptible to popular opinion, advertising, propaganda, and mass persuasion which cause them stress and uncertainty.

He was able to show that consumer choices are quite often normative behavior. Tversky developed a loyal following prior to his sudden death at his Palo Alto home on June 2, 1996. He was 59 years of age.

Many of the ideas developed in Tversky's economics theory were first published in the 1950's theoretical writings of Howard Hobbs, a Ford Foundation Fellow and graduate student at Fresno State College. Hobbs, a conservative at heart, was primarly intrested in free market capitalism, law, and government. He was captivated by what Adam Smith, the father of modern economics, described as the invisible hand, where virtue begets virtue, through the operation of the division of labor. By serving one's own interests, people advance the civic or common interest. To Smith self-interest is the equivalent ot 'moral unrightness.'Though Hobbes was interested in civic virtue, he was unconvinced that economic theory could or should be efficiently utilized to bring about an egalitarian society.

In the writings of Smith, Hobbs had not found the precept for the advancement of civic enterprise through conservative free market capitalism. Instead, Hobbs found the 'hidden moral ethic'foundation of modern social science theory: "Moral uprightness is rewarded with personal and material success. Success contributes to the well-being of society." Smith's model value-judgment, Hobbs believed,was an apt depiction of the underlying fault with the economist's calculus.

Howard Hobbs challenged the Smithian premise that 'man is free to be good.' Hobbs asserted, like his noted ancestor, Thomas Hobbes, that human beings are not naturally good and that it is easier for human beings to become corrupt than it is for them to achieve perfection. Chief among the value judgments of Smith's 'classical economics' is the bias in favor of moral precepts or notions about the sanctity and moral equality of every individual in the society.

Public policy has derived the 'welfare state' model of civic charity from that idea. Welfare statism adopted in the 1930's New Deal administration of Democrat Party president Roosevelt. The faulty economic assumptions of that era have, by now, produced a vast redistributionof the wealth of the middle class as a form of 'civic entitlement' to the non-productive, under-educated, poor.

Public policy advocating expansion of government services, deficit spending, mis-allocation of Social Security trust funds, burdensome government regulation of business, taxes on profits, all have been falsely 'justified' by government economists for more than 50 years as 'fulfillment of the American dream'.

Economics, a social science, comes to us already packaged with the subtle 'utopian' bias of the plausible 'perfect world' which economists often speak of as a condition with 'all things bring equal.'

Hobbs had arrived at a clear understanding of the dynamics of free marketeconomic markets after several years of field studies in economic growth and mass market practices in Japan. Hobbs published his Japanese study describing the Japanese phenomena of mass marketing psychologyin his book Kezai Nihongopublished in Tokyo in 1956.

Hobbs'behavioral economics theory first appeared in his 1959 critique sponsored by the Ford Foundation The Civil Economics of Thomas Hobbes. That text is currently in a third edition. Hobbs is presently the Economics Editor of the Daily Republican Newspaper.

Hobbs is also the Chief Economist and Director of analysis for the Economics Institute in Sacramento, where he is principally responsible for the development and implementation of innovative and state-of-the-art approaches for the economic analysis of local and regional economies. He received a Bachelor's Degree in economics from Fresno State University (1959), a Doctorate in economics education from the University of Southern California (1981).

Hobbs also has earned graduate degrees in law and educational psychology. He has extensive experience in the development of economic indicators, forecasting, and analysis. This experience includes the development and maintenance of Composite Indices of Leading and Coincident Indicators for the State of California in 1958 whle a Ford Fellow in the State Legislature. These indices were closely followed and have been updated through the years.

The Economic Indices have been made available to thousands of local and national government agencies, schools and colleges in the United States and in foreign countries. They are being made available without charge by the Daily Republican Electronic News Service.

Howard Hobbs'behavioral economics theory and Tversky's irrationality economics behavior theory have been resisted over the years. To mainstream economists, markets are the great economic engine of rational man. For example, when buying a car, a purchaser is likely to be influenced by subtle psychological appeals of the sales staff.

We are, therefore, not cool and calculating. Often, because of the psychological influence on the car customer, the new car purchase is overpriced. But, according to economics texts, the sequence just described is never assumed to be true.

According to the efficient-market theory, which is the state religion of economics departments and business schools, prices are so uniformly rational that no one can consistently profit from exploiting mis-priced stocks.

Actually beating the stock market is a presumed an impossibility. Consistently successful stock market investors are not rational - just lucky. Since each stock price is assumed to be "rational" each up-tick and down-tick of every stock is also assumed to be "rational". The amount that any one stock has moved up or down has been widely accepted as a proxy for the amount of risk associated.

Hobbs' interpretation is that stock prices are occasionally irrational and many short-term up-ticks and down-ticks are meaningless, the product of the "herd" first leaning to one direction and then another.

A small but growing school of economists are coming around to the way Hobbs saw it in 1959 and the way Tversky has been teaching it at Stanford University up to the time of his death.

In their view, the human traits that do influence behavior, e.g. the fear of loss and ridicule, also affect market changes. "One of the biggest errors in human judgment is to pay attention to the crowd," says Robert Shiller, a Yale economist.

This explains the crash of 1987, when stocks fell 23% on no news, at all. It also explains much day-to-day behavior. If markets merely re-priced stocks in "rational" fashion, that is, adjusting for changes in long-term earnings expectations, stocks would go weeks with scarcely any price change at all. In fact, on most days, many stocks would scarcely trade.

By the same reasoning, companies would only rarely split their stock because it would be an empty exercise that costs a lot of money but wouldn't permit profit taking. So, why do companies split there stock? Professor, Richard Thaler at Chicago, in 1926, noticed that when a ticket to the movies cost 25 cents, the average share on the Big Board was $35. It is still, roughly, $35. Investors apparently like it that way. But there is no logic to it.

This type of reasoning belongs to the school of behavioral economics. It holds that the old theory of market rationality doesn't fit the human actors who actually buy and sell in the market place. Hobbs found that people investing for retirement and who keep track of their performance by-the-month tend to be more fearful of short-term paper losses and more likely to invest in bonds.

But people investing on a yearly basis do a lot better. By studying Japanese mass consumer behavior, professor Howard Hobbs, of the Economics Institute in Sacramento, found that at the peak of the Japanese market, 14% of Japanese investors expected a crash. After it did crash, the figure was still only slightly higher.

Such work once was considered heretical. But, Hobbs' behavioral economics theory is now a hot topic, even among neo-classical oriented economists. A noted economist said recently, "I have been driven by the idea that rationality doesn't describe a whole lot of behavior. People get frightened" and behave irrationally. Stocks with the lowest price-to-earnings ratios are widely discussed as a gamble, yet these stocks continue to be traded vigorously. Why? Because they are an open invitation to easy money seen though the efficient-market theory which says profit taking on them is impossible."

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