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2009 | Buch

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Reflexivity in Economics

An Experimental Examination on the Self-Referentiality of Economic Theories

verfasst von: Dr. Serena Sandri

Verlag: Physica-Verlag HD

Buchreihe : Contributions to Economics

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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Über dieses Buch

Since the individuals are not just stimulus-response machines but more complex beings that think and are simultaneously conscious of their thought, re?exivity is potentially involved in all human acts of cognition and in all conceptualizations. On this basis, each human discourse can be characterized as a way of thought f- mulation and therefore, reveals a self-referring nature. On this level of re?exivity, the individual thought shapes beliefs and mental representations which give life to mental models and strive to predict future events and developments to support the individuals in their decision-making. Such mental models are re?ected by the - dividuals themselves and on the situation they are confronted with. According to the result of this recursive application, the individuals will then decide which model they want to refer to, or in other words, which model they want to absorb. Similarly, the individuals can make use of social theories and predictions which can therefore yield recursive effects and interfere with the phenomena they aim to depict. Revealed theories, if accepted, may in?uence the behaviour or the agents they focus on, either in the sense of validation of the theoretical content or in that of its rejection.

Inhaltsverzeichnis

Frontmatter

1. Reflexivity and Self-Reference

The phenomenon of referring is pervasive and regards all fields of human thought and activity, so much that it appears to be an inescapable basis of all that can be thought, conceptualized and expressed. The human capability of referring creates the basis for ordering the subjective perception of the world, for interpreting events, for interacting with others, etc., thus creating the basis for all activities which regard human cognition and which are essential for individual survival. Being able to establish self-references is even a necessary prerequisite for self-change and behavioural adjustment. Furthermore, the reflexive capacity underlies basic problemsolving abilities and makes mental adaptiveness possible.

Consciousness (in the form of self-consciousness) can be identified as the main source of reflexivity for human thought and action. Individuals think and are simultaneously conscious of their thought, so that all discourses are both directed to outward reality (the external world) and to the inner reality of the individual who formulates them, since she is conscious of expressing them. Therefore it can be said that each human discourse, being a human way of thought formulation, has a self-referring nature.

This chapter is dedicated to the analysis of the polyvalent concept of “self-reference.” After its definition which will be accompanied by an overview of the different kinds of reference relations some common varieties and possible taxonomies for self-reference will be presented. The polymorphism of self-reference will be illustrated by its implications for formal and natural language. Logical consistency of self-reference in its different forms and contexts of appearance will then be discussed, in that the relation between self-reference and paradoxes will be deepened and some guidelines for testing the legitimacy of self-references will be extrapolated. The chapter concludes discussing the role of self-reference for human understanding as well as for social and individual decision making.

2. Reflexivity of Social Reality

The previous chapter has underlined the polymorphism of self-reference and its involvement in any form of human understanding, activity and conceptualizing. As neither social reality, nor its observation or description can be abstracted from their self-referential character, reflexivity and its implications are of central concern for social research in general. Accordingly, this chapter focuses on the reflexivity of social reality and phenomena and discusses some of its implications.

In particular, two different orders of reflexivity can affect social reality: a first order of reflexivity involves social reality per se and consists of the social phenomena that are self-referential in that they may affect themselves, as they can for example imply, control, or modify their own dynamic or development. A second order of reflexivity concerns the “discourses” on social reality, such as social sciences and theorizing. The present chapter offers an overview on common reflexive social phenomena, while the Chap. 3 focuses on the second order of reflexivity concerning social sciences and theories.

It can be essentially premised, that the first order of reflexivity, which invests social reality, depends on the autopoietic character of social phenomena that create themselves on the basis of their inescapable systemic character. The second order of reflexivity can be fully appreciated if related to the constructivist observerobservation scheme, as it will be discussed in more detail in the Chap. 3.

One of the first difficulties that the analysis of the reflexivity of social reality posits is represented by the huge range of phenomena which can be subsumed under the label “social reality.” Therefore, the analysis will begin with specifying the notion of “social reality,” which will be conceptualized in opposition to “natural reality.” After that, some notes on the reflexivity of social reality will introduce an overview on some common and widely analysed reflexive social phenomena. This overview does not have the claim of being comprehensive and ranges from anthropology, linguistics, law, politics, sociology, and psychology, and then concludes with examples of reflexivity involving the economic reality, as illustrated by the dynamic of financial markets and of the business cycle.

This overview is conceived as a natural first step for the successive enlargement (in the Chap. 3) to the reflexivity affecting social research and theorizing.

The difference between reflexive social phenomena and social discourses that lead to reflexive social phenomena, which has been condensed in the notions of first- and second-order reflexivity, is not so clear and sharp as one could think at a first glance. Social reality is in the end by human activity, which is coined by human thought and consciousness, so that the separation between action and cognition, between practical and intellectual activity, is something fluent, a continuum rather than a dichotomy. Reflexivity of social reality is due to the fact that the intentional action of the individuals defines the course of the social system the individuals belong to.

3. Reflexivity and Predictability of the Social Sciences

Reflexivity is inevitably involved in all social facts and discourses about social reality because social discourses are inevitably made by an observer who is part of the system of observation. Discourses on social reality are elaborations that transcend meta-logically the reality they focus on, as they are formulated by a subject that cannot be disentangled from the observed object.

This chapter addresses the unavoidable reflexive nature which characterizes all kinds of discourses about social facts and reality. This can be ascribed to the involvement of the observer in the system she observes and constitutes an inescapable condition in which all human conceptualizations concerning social facts are caught. In set-theoretical terms, human discourse's self-referring character is given because its domain (the subject of the analysis) is embedded in the range to which it refers (the object of the analysis).

Reflexivity of this kind, which is implied by the so-called “observer-observation problematic,” constitutes a peculiarity of the social sciences and finds no real equivalent in the natural sciences. Its most similar problem is represented by the Heisenberg's uncertainty principle. This can be traced back to the observer effect and ascribed to the interference of the act of analysing with the analysed object. Starting from these premises, constructivism extends the effects of reflexivity to any form of human analysis because the act of human observation inevitably concurs to shape the object to which it refers. Constructivism states that all that can be experienced or thought is “constructed,” so that reflexivity constitutes an inescapable basis of all that can be thought and conceptualized. Reflexivity belongs therefore to one of the central concerns of the constructivist analysis and represents a key concept for deepening human cognition and behaviour.

Therefore, the first part of this chapter focuses on the perspective of radical constructivism. Its essential fundaments will be illustrated discussing the observerobservation scheme and the construct of the self. The specified constructivist perspective will then be adopted for discussing and modelling the cognitive processes. Some implications of reflexivity for social research and economics, as they emerge from the approach of constructivism, will then be addressed.

The second part of the chapter addresses the implications of reflexivity of the social sciences for the predictability of social and, in particular, economic reality. After an introduction on different approaches to social predicting, the processes of explaining and predicting social reality will be compared. The self-altering, reflexive effect of social predictions which will emerge in this insight will then be developed, and reflexive predictions will be discussed.

4. On the Rationality of the Economic Actors

Modern economic theory follows the neoclassical approach and largely relies on the paradigm of rational choice. The paradigm of rational choice interprets human decision making as fully rational and based on Bayesian optimization of subjective utility. This rational way of modelling human decision making stems from the axiomatic characterization of utility and subjective probability rather than from the direct empirical observation of the human economic behaviour. There is plenty of evidence which questions the rational choice approach, both for its interpretation of decision-making and for the assumptions on which it is based. Decisive critiques also come from interdisciplinary studies which integrate economics with findings from psychology, neurology, research on artificial intelligence and cognitive disciplines in general.

From these criticisms alternative characterizations of the rationality of the economic actors have been formulated, so that different “visions of rationality” coexist in economic literature and assume different standards of rationality (see Fig. 4.1).

While models of full or perfect rationality assume that “the human mind has essentially demonic or supernatural reasoning power,” models of bounded rationality underline the boundaries of human reasoning. Perfect rationality of the economic actors is interpreted as their capability of performing unbounded rational reasoning and is modelled by probability theory and concretized in the optimization under constraints.

Models of bounded rationality stem from the empirical observation of economic decision-making and are essentially informed by the systematic violation of the rational choice paradigm. Sub-optimal outcomes are not just odds that get eliminated because of the principle of survival-of-the-fittest. They configure in many cases stable solutions. Admitting the boundaries of the subjective rationality means to interpret the deliberate decision-making process as “the ability to construct new representations of problems” and stresses the “distinction between two types of cognitive processes — the effortful process of deliberate reasoning on the one hand, and the automatic process of unconscious intuition on the other.” As represented in Fig. 4.1, there are essentially “two main forms of bounded rationality: satisficing heuristics for searching through a sequence of available alternatives, and fast and frugal heuristics that use very little information and computation to make a variety of kinds of decisions.”

This chapter offers an overview on the rationality debate in economics. After discussing the unsolved dualism between rationality assumption and psychology of choice, some of the solutions adduced in defence of the neoclassical paradigm will be presented. The bounded rationality approach will then be introduced and it will be focussed in particularly on the pioneering contributions of Simon and of Kahneman and Tversky. The illustration of some principles of human problemsolving, framing-effects and prospect theory will then conclude the chapter.

For convenience, the analysis of heuristics (both as sources of behavioural biases and as ecological aspects of bounded rationality) will be examined in the next chapter. This will serve as an introductory discussion on the debiasing research. The debiasing research will be considered as a possible inspiration for developing a suitable framework for the experimental analysis of the self-referentiality of economic theories and theory absorption.

5. Heuristics, Biases and Methods for Debiasing

Prediction is involved in many recurrent tasks individuals are confronted with and can be seen as the result of the interaction between “judgement, intuition, and educated guesswork.” Even when forecasts rely on mathematical methods the central role of intuition cannot be denied as it supervises e.g. the choice of variables that belong to the model, their initial value and their functional specification.

This chapter deepens a central aspect for human cognition and problem-solving, namely that individuals make use of bounded rational heuristics for taking decisions under uncertainty. Heuristics are simplified procedures for assessing probabilities. They are based on rules of thumb. They rely on mental clues which selectively orient the search process and enable the individual to reach her goals when time, informational and computational capabilities are constrained.

Although in some cases bounded rational heuristics can be made responsible for the sub-optimality of outcomes and for behavioural biases. In some other cases it represents an essential support for carrying on inference when complexity overloads the individual cognitive and computational capabilities. It enables the individual to reach better solutions than otherwise.

There are mainly two different approaches to subjective judgement and bounded rational heuristics, namely the “heuristics and biases” approach, pioneered by Kahneman and Tversky, and the “ecological rationality” approach, with Gigerenzer as one of its most influential proponents.

6. Self-Referentiality of Economic Theories and Theory Absorption

Bounded rational social actors are not just stimulus-response machines but complex beings, whose actions are led by their own beliefs and mental representations. Such representations can shape mental models, subjective theoretical frameworks that predict the course of the social system the actors are involved in and that establish cause-effect relations that the individual uses in her decision-making. Individuals can modify their mental models when they are not satisfied with the results of their application. This operation requires that the individuals are able to reflect the theoretical statements on themselves and on the situation they are confronted with. According to the result of this reflection process, they will then decide which theory they want to refer to, or in other words, which theory they want to absorb.

Economic theories aim at the description and prediction of economic behaviour and interactions, but at the same time interfere with the phenomena they aim to depict. Revealed theories, if accepted, may influence the behaviour of the agents they focus on, either in the sense of validation of the theoretical content, or in that of its rejection.

This analysis tries to discuss the implications of those recursive, or self-reflexive effects of economic theories on bounded rational economic behaving and interacting. In particular, a distinction will be made between the perception of the selfreferentiality of a theory by bounded rational individuals (i.e. the perception of its applicability to a concrete setting) and its absorption (i.e. the compliance of the decision makers with the prescriptions of the theory).

The discrepancy between the neoclassical rationality standard and the observable cognitive limitations that constraint the subjective rationality further complicates the evaluation of the role of mainstream theories in influencing economic interactions and behaviour. The problem of how bounded rational actors process the content of theories of full rationality undoubtedly is worth being explicitly analyzed because it could particularly yield interesting results e.g. for enhancing efficient economic advising. However, normative prescriptions for economic advising could also be taken from theories of bounded rationality if it could be proven that such theories enjoy a broader acceptance by the bounded rational actors and survive to their absorption.

7. On the Absorbability of Economic Theories – An Experimental Analysis

Although reflexive phenomena have been widely observed in economics, the analysis of the mechanisms that lead bounded rational individuals to accept and eventually comply as far they could with theoretical prescriptions is still at its beginning.

The point is that even if, in principle, the reflexive implications of social theorizing on the economic actors can never be ruled out, their occurrence actually depends on the understanding, acceptance and coherence between a certain theory and the individual mental models. The recursivity of economic theories and their absorption will therefore differ from case to case, which means that the inquiry of this topic cannot only rely on theoretical speculations but needs to be supported by empirical findings. In particular, the analysis has to address the following issues: (1) how real economic actors perceive the recursive character of economic theorizing; (2) if and under which conditions economic theories affect the behaviour of the economic actors in a self-referential way; and (3) how the self-referentiality of economic theories can be empirically tested.

The experimental part of this study can be conceived as an attempt to approach the wide and complicated field of the recursivity of economic theories and to explore the possibility of testing the validity of such theories relying on their absorbability among bounded rational individuals.

In the first section of this chapter, after some introductory considerations on the experimental method in economics, a possible approach to the experimental analysis of the self-referentiality and absorbability of economic theories will be proposed. In this regard, some related research concerning absorbability and task transcending of satisficing will be discussed. The indicative results of some preparatory attempts at testing the self-referential implications of theories that have been conduced in the form of pilot and classroom experiments will be briefly presented. In consideration of their scarce statistical validity and questionable methodological hygiene, however, extreme caution is advised in interpreting the hints they provide.

Backmatter

Titel: Reflexivity in Economics
verfasst von: Dr. Serena Sandri
Verlag: Physica-Verlag HD
Electronic ISBN: 978-3-7908-2092-8
Print ISBN: 978-3-7908-2091-1
DOI: https://doi.org/10.1007/978-3-7908-2092-8

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