Consider this cartoon. It’s funny but it also represents a leading criticism of neoclassical economics.
The wrong lesson to draw is that neoclassical economics is false. Instead we should learn that it is nuanced, which this comic illustrated, and that it is imperfect, which is what Daniel Kahneman’s book is all about. Both lessons can be learned from psychology, and both lessons have been generally neglected by economists.
I think these kinds of psychological experiments actually do not exhibit any imperfection of the neoclassical model of human behavior. Instead it is a mistake of the economist (or cartoon writer) to apply it in a nuanced way. The question we have to ask the woman who won’t accept $5 is, “what would you be losing by taking the money?” Neoclassical model says, “something worth more than $5” the irrational model says, “something worth less than $5 or nothing”. Feelings of dignity, fairness, or pride are all answers we can insert into the model in order to make sense of the woman’s behavior. There are more values at play than money which the experiment does not apply controls for in order to determine how rational or irrational the subject is being.
By the way, I suspect most people wouldn’t give up much more than $5, indicating that these ethereal values are really skin deep. Even the neoclassical model applied in an un-nuanced way captures 90% of what’s going on.
Human value is more nuanced than dollars and cents, and in contrast to cartoonish depictions of economists, they recognize this. No economist believes that people should always take the highest wage job. They know that it is “rational” to take a lower paying job in exchange for better working conditions for example. Economists don’t treat money like it only matters, but that it always matters. The problem is when we get into the nitty gritty and the values become very subtle, as moral intuitions generally are, they become easy to ignore.
Although the cartoon doesn’t speak to it, the neoclassical model does have genuine flaws. People do make systematically irrational decisions. But people also make systematically rational decisions So the correct solution is not to discard the rational model, but to fit it into a broader framework which captures the ways in which human beings predictably act rationally and irrationally.