From a rational perspective, we should make only decisions that are in our best interest (“should” is the operative word here)… and choose the option that maximizes our best interests… Unfortunately, we’re not.”
This is where behavioral economics enters the picture. In this field, we don’t assume that people are perfectly sensible, calculating machines. Instead, we observe how people actually behave, and quite often our observations lead us to the conclusion that human beings are irrational.”
The above and subsequent quotes are taken from Dan Ariely’s book, The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home. Ariely is a Professor of Psychology and Behavioral Economics at Duke University and author of other works on behavioral economics.
Standard Economics Vs. Behavioral Economics: A Matter Of Perspective?
… there is a great deal to be learned from rational economics,” he says, “but some of its assumptions—that people always make the best decisions, that mistakes are less likely when the decisions involve a lot of money, and that the market is self correcting—can clearly lead to disastrous consequences.”
Social And Market Forces
The Financial Crisis
… think about the implosion of Wall Street in 2008 and its attendant impact on the economy. Given our human foibles, why on earth would we think we don’t need to take any external measures to try to prevent or deal with systematic errors of judgment in the man-made financial markets?”
This is where behavioral economics veers far from standard economics, because it seeks to look at human evolution and psychology in addition to standard economics, in order for social and market forces to be able to exist in balance:
Essentially the mechanisms we developed during our early evolutionary years might have made perfect sense in our distant past. But given the mismatch between the speed of technological development and human evolution, the same instincts and abilities that once helped us now often stand in our way. Bad decision-making behaviors that manifested themselves as mere nuisances in earlier centuries can now severely affect our lives in crucial ways.”
The Need To Address Human Nature
Ariely argues that this dichotomy between social and market forces, and some of our technological developments existing in discordance with our evolutionary development/nature, holds ramifications far beyond the credit industry:
When the designers of modern technologies don’t understand our fallibility, they design new and improved systems for stock markets, insurance, education, agriculture, or health care that don’t take our limitations into account (I like the term “human-incompatible technologies,” and they are everywhere).”
Behavioral economists want to understand human frailty and to find more compassionate, realistic, and effective ways for people to avoid temptation, exert more self-control, and ultimately reach their long-term goals. As a society, it’s extremely beneficial to understand how and when we fail and to design/invent/create new ways to overcome our mistakes.”
All quotes taken from Prof. Ariely’s book, The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home.
Image of Prof. Ariely courtesy of his most recent Pop Tech Talk on Adaptive Responses [21 min.]