For Greek press here.
Dan Ariely on Behavioral Economics at his best-seller ‘Predictably Irrational’ 2008 (p.239-242)
Behavioral economics is an emerging field focused on the (quite intuitive) idea that people do not always behave rationally and that they often make mistakes in their decisions. In many ways, the standard economic and Shakespearean views are more optimistic about human nature, since they assume that our capacity for reasoning is limitless. By the same token the behavioral economics view, which acknowledges human deficiencies, is more depressing, because it demonstrates the many ways in which we fall short of our ideals. Indeed, it can be rather depressing to realize that we all continually make irrational decisions in our personal, professional, and social lives. But there is a silver lining: the fact that we make mistakes also means that there are ways to improve our decisions—and therefore that there are opportunities for “free lunches.”
ONE OF THE main differences between standard and behavioral economics involves this concept of “free lunches.” According to the assumptions of standard economics, all human decisions are rational and informed, motivated by an accurate concept of the worth of all goods and services and the amount of happiness (utility) all decisions are likely to produce. Under this set of assumptions, everyone in the marketplace is trying to maximize profit and striving to optimize his experiences. As a consequence, economic theory asserts that there are no free lunches—if there were any, someone would have already found them and extracted all their value.
Behavioral economists, on the other hand, believe that people are susceptible to irrelevant influences from their immediate environment (which we call context effects), irrelevant emotions, shortsightedness, and other forms of irrationality. What good news can accompany this realization? The good news is that these mistakes also provide opportunities for improvement. If we all make systematic mistakes in our decisions, then why not develop new strategies, tools, and methods to help us make better decisions and improve our overall well-being? That’s exactly the meaning of free lunches from the perspective of behavioral economics—the idea that there are tools, methods, and policies that can help all of us make better decisions and as a consequence achieve what we desire.
For example, the question why Americans are not saving enough for retirement is meaningless from the perspective of standard economics. If we are all making good, informed decisions in every aspect of our lives, then we are also saving the exact amount that we want to save. We might not save much because we don’t care about the future, because we are looking forward to experiencing poverty at retirement, because we expect our kids to take care of us, or because we are hoping to win the lottery—there are many possible reasons. The main point is that from the standard economic perspective, we are saving exactly the right amount in accordance with our preferences.
But from the perspective of behavioral economics, which does not assume that people are rational, the idea that we are not saving enough is perfectly reasonable. In fact, research in behavioral economics points to many possible reasons why people are not saving enough for retirement. People procrastinate. People have a hard time understanding the real cost of not saving as well as the benefits of saving. (By how much would your life be better in the future if you were to deposit an additional $1,000 in your retirement account every month for the next 20 years?) Being “house rich” helps people believe that they are indeed rich. It is easy to create consumption habits and hard to give them up. And there are many, many more reasons.
The potential for free lunches from the perspective of behavioral economics lies in new methods, mechanisms, and other interventions that would help people achieve more of what they truly want.
Richard H. Thaler and Cass R. Sustein on ‘Nudge’?
The ‘nudge theory’ was coined and popularized in the 2008 book, ‘Nudge: Improving Decisions about Health, Wealth and Happiness’, written by American academics Richard H. Thaler and Cass R. Sustein.
According to the authors (2008, page 6):
“A nudge […] is any aspect of the choice architecture that alters people’s behavior in a predictable way, without forbidding any options or significantly changing their economic incentives. To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting the fruit at eye level counts as a nudge. Banning junk food does not.”
For more information on ‘Nudging’ check the recent interview By PG Hansen, PhD., Behavioral Scientist here.
References
- DAN ARIELY (2010) Predictably Irrational: The hidden forces that shape our decisions
[Online] Available from:
www.amazon.com/Predictably-Irrational-Revised-Expanded-Decisions/dp/0061353248/
- RICHARD H. THALER AND CASS R. SUSTEIN (2008), ‘Nudge: Improving Decisions about Health, Wealth and Happiness’
[Online] Available from:
www.amazon.com/Nudge-Improving-Decisions-Health-Happiness/dp/014311526X
For Greek press here.
[…] Intro to B.E. and Nudge […]