#23: Behavioral Economics
I have a confession. I hated most of my college Economics classes. I found many of my major’s classes to be boring and theoretical. The microeconomics classes weren’t very applicable to the real world, and I found the macroeconomics ones to only be slightly more enjoyable. I always found the basic principle of Economics—that people always make decisions that provide them with the highest amount of personal utility—to be peculiar. This presumed that humans always acted rational, which I always thought was a ridiculous assumption.
Then, finally in my senior year, I stumbled upon a Behavioral Economics class, which tossed the assumption that people always acted rational out the window. Finally, I thought to myself. The class was a good introduction to the material, but much of the curriculum and problems were overly quantitative, which turned me away temporarily. But it had piqued enough of my interest that I soon became fascinated with the discipline, which had so many real world applications.
This led me to reading Predictably Irrational by Dan Ariely, one of my all-time favorite books. He covers some incredibly fascinating ideas in the book including how we value things more simply because we own them, a concept more commonly known as the endowment effect. He discusses how we will do anything for something labeled “free”, including giving up the cost of time, and forgoing the value of the product or service we are getting because it’s free! He busts the myth that ripping a bandaid off is less painful than taking one off slowly, which I often annoyingly remind my friends and family about. He also presented a study where a placebo had an equal effect on patients as the actual drug, creating an interesting moral predicament as to whether placebos should be used more often in medicine.
Behavioral Economics is so intriguing to me because it revolves around our thinking and decision-making, which impacts each and every one of us not just every day, but nearly every instant of our lives.
As an example, in this moment, as I write this sentence, I am thinking about exactly what I should write. I quickly and almost unconsciously put words on the page. As I write, the first iteration of the words on this page may not be perfectly logical. It’s just free flow. Then I edit. I have a process to be more thoughtful, and slow, and deliberate about each word I use and the significance.
I am now reading Thinking Fast and Slow by Daniel Kahneman, which lays out the concept of system 1 vs system 2 thinking. System 1 is the more automatic, intuitive, emotional, unconscious, fast thinking, where system 2 is analytical, thoughtful, logical, conscious, slow thinking. The idea here is that most day-to-day decisions are made using system 1, but system 1 is not highly resistant to biases. In relation to my writing, system 1 is the free flow process. System 2 is the editing process.
While I am continuing to learn more about the field, the awareness of behavioral biases is only so helpful. Kahneman argues that changing someone else’s behavior is not something that is easily done.
I think changing behavior is extremely difficult. There are a few tips and a few guidelines about how to do that, but anybody who’s very optimistic about changing behavior is just deluded. It’s hard to change other people’s behavior. It’s very hard to change your own. Not simple.
Being aware of these biases often doesn’t make you any better at resisting them. Further, he argues that system 1 and emotions often cloud system 2 from operating as it should:
What gets in the way of clear thinking is that we have intuitive views of almost everything. So as soon as you present a problem to me, I have some ready made answer. What gets in the way of clear thinking are those ready made answers, and we can’t help but have them…We have beliefs because mostly we believe in some people, and we trust them. We adopt their beliefs. We don’t reach our beliefs by clear thinking, unless you’re a scientist or doing something like that. There’s a fair amount of emotion when you’re a scientist as well that gets in the way of clear thinking. Commitments to your previous views, being insulted that somebody thinks he’s smarter than you are. I mean lots of things get in the way, even when you’re a scientist. So I’d say there is less clear thinking than people like to think.
These books and this discipline offer us both a shocking revelation and a remedy, depending on how you view it. Yes, we are all irrational, and we all are biased in our thinking. But that means when we make poor decisions, or we make mistakes, human nature is also playing a part.
We make thousands of choices and decisions in our lives, and I spend time looking back and regretting a previous decision or reflecting on whether I made the “right” one.
Behavioral economics suggests we shouldn’t judge or regret decisions too much because we are all human, and human biases and motivations are complex. As to whether I made the right or wrong decision, as I mentioned in a previous post, the key is to not define success on the outcome, but by the learning. Once I do that, the outcome is always right as long as I am continuing to move forward in my educational growth.
I’d encourage more people to read up on behavioral economics as it gives us an opportunity to learn more about how we think and how we make decisions.
P.S. If you want to hear more about decision-making and a little bit about risk-aversion, I did a racket with my friend, and fellow On Deck Writer alum, Jerry, on this very topic. Check it out, and let me know what you think!