Panhandlers and Price Theory

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In my previous two posts (here and here), I focused on the role of price theory in explaining drug use. One reason that I wrote those posts is that I wanted to illustrate that price theory has explanatory power beyond the standard examples. I’m a firm believer that price theory is useful for understanding any decision that involves costs (which is essentially all decision-making). This doesn’t mean that there aren’t other useful tools or even that price theory is the most important tool in all circumstances. Nonetheless, price theory often has something to add when it comes to understanding decision-making.I also like examining topics like this precisely because they highlight what price theory is and is not. Price theory is a framework for understanding, explaining, and predicting human behavior. Price theory is not a theory of mind.A different way of thinking about this is as follows. In the early days of behavioral economics, a number of researchers focused on finance. The reason that they focused on finance is that financial markets tend to be populated by professional finance people who have an incentive to get things right and acquire information. Financial markets are also characterized by frequent trading and highly liquid markets. Given those characteristics, the thinking was that if behavioral assumptions could survive financial markets and not simply be arbitraged away, this would be strong evidence in favor of these behavioral assumptions. We can debate whether that turned out to be true. Nonetheless, the sentiment itself is useful.I take a similar view of using…