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
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
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
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."