Reconciling Normative and Behavioural Economics

A Conference to be held at University of East Anglia, UK

April 3-5 2008

Introduction

Conference Overview

Introduction

Normative and descriptive economics have customarily proceeded from a common set of premises about the rationality of individuals’ preferences and actions. Preferences are held to be consistent and context-independent, and actions are held to conform with those preferences. In descriptive economics, hypotheses about the economic environment and about the content of preferences are proposed and then subjected to evidential scrutiny, with the rational choice premises treated as given. In normative economics, economic institutions, projects or policies are treated as justified to the extent that their outcomes are ranked highly in the preference orderings that agents have been assumed to possess.

However, in the last 25 years behavioural economics has adopted a descriptive approach that extends the reach of evidential scrutiny to include the standard postulates about preferences and actions. It has highlighted a wide range of anomalies: robust and systematic regularities in behaviour which, taken at face value, contravene standard assumptions about the consistency and context-independence of preferences. Behavioural economists have suggested explanations for these anomalies using well-established psychological principles that could in principle be applied to descriptive economics more generally. There is growing interest in developing such applications, for example as ‘behavioural finance’ and ‘behavioural industrial organisation’. But this approach poses severe difficulties for normative economics: if revealed preferences are no longer supposed to be consistent and context-independent then they lose much, or all, of their normative force.

There is now a need to develop methods of reconciling normative and behavioural economics. The Economic and Social Research Council (ESRC) of the UK is supporting a programme of research into this reconciliation problem, directed by Prof. Robert Sugden of the School of Economics at UEA and with Dr Ben McQuillin as Senior Research Associate.

As part of this programme, and with support also from the ESRC Centre for Competition Policy, a conference on Reconciling Normative and Behavioural Economics will be held at the University of East Anglia, Norwich, UK on 3-5 April 2008.