The History of Psychology in Economics: The Cases For and Against Psychology

Paper Session

Saturday, Jan. 7, 2017 2:30 PM – 4:30 PM

Hyatt Regency Chicago, Soldier Field
Hosted By: History of Economics Society
  • Chair: Mario J. Rizzo, New York University

The Strange History of Path-Dependency and Reference Points in Neoclassical Demand Theory

Wade Hands
University of Puget Sound


Behavioral economists regularly emphasize how reference points and path-dependencies distort rational decision making and thus cause various systematic anomalies in individual behavior. It is generally argued that these features of individual decision-making have not been recognized within mainstream neoclassical economics. I will argue that while these factors were generally missing from neoclassical theorizing after the stabilization that took place during the 1950s, there were many earlier neoclassical economists – particular during the so-called ordinal utility revolution of the 1930s – that recognized these issues and tried to develop theories of consumer decision-making that could accommodate such facts about individual choice behavior. This raises questions about the standard narrative regarding the relationship between the anomalous decision-making identified within the psychology-based literature and traditional neoclassical theory.

The 'Inscrutability of the Mind': How the End of Interpersonal Comparisons Removed Psychology from Economics

David Levy
George Mason University
Sandra Peart
University of Richmond


When Robbins denied the scientific status of interpersonal comparisons of well-being, he noted in passing that this interest in comparing utility across individuals was the result of the overlap between utilitarians and political economists. Looking backward at the great utilitarian political economists we see a deep engagement with psychology. James Mill’s 1829 Human Mind was reissued in 1869 by John Stuart Mill with extensive commentary by himself and Alexander Bain. F. Y Edgeworth’s Mathematical Psychics is replete with discussion of psychological results. Herbert Spencer, whose relationship to utilitarianism is complicated, revived Adam Smith’s classic of moral motivation, Theory of Moral Sentiments, at midcentury. By contrast, George Stigler wrote that economists of his generation did not pay much attention to TMS because they did not concern themselves with psychology. We investigate the engagement with psychology, and its decline, amongst political economists.

That Old Time Religion: Why Economists Used to Say that Psychology Should Stay Out of Economics

Mario J. Rizzo
New York University


The case for not including psychology in economics rested on several pillars. The first was an attempt to escape the peculiarities of hedonic psychology and to construct a general theory compatible with many psychological perspectives. The second was part of the general philosophical escape from psychologism and acceptance of the logic of choice as analogous to pure logic. The third was the movement to disregard the axioms of rationality as a description of the behavior of real individuals but as simply animating principles of constructs designed to explain aggregate market behavior. And the fourth was the idea (promoted by the earlier neoclassical theorists) of rationality as descriptive of equilibrium behavior only -- combined with the view that the world was not always in equilibrium.

Frank Knight's Appraisal of Behavioral Economics

Bart J. Wilson
Chapman University


Eighty years before there was behavioral economics, Frank Knight pondered the limitations of the scientific treatment of human data. He expressed concern over the “needless confusion” of applying to economics the ideas of ‘static’ and ‘dynamic’ equilibria, which have precise meanings in mechanics, but which are anything but precise in human conduct. For though we can “explain” human conduct ex post facto, that is, we can recognize our own meanings in what fellow humans do, we cannot predict ex ante what any specific individual will do in the laboratory like we can predict water wave mechanics in the laboratory. Humans respond to meaning. And meaning can only be “suggested rather than stated,” which is why “sociology and economics must be branches of literature as much as of science.”
JEL Classifications
  • B0 - General
  • D3 - Distribution