Wednesday, August 10, 2016

MISBEHAVING THE MAKING OF BEHAVIOURAL ECONOMICS

Most of us have been reassured that Economics is the most rational of the social sciences, but the practitioners often tend to overlook the human factor.  Richard H.Thaler a few decades ago noticed that many people did not make rational economic decisions often in concert with others (you already knew that.)  Recently I read an earlier book, "Nudge" co-written with Cass Sunstein where the two of them developed the phrase "libertarian paternalism" which seen by some as an oxymoron they interpreted as giving people a logical choice, but also the freedom not to take.

"Misbehaving" is a history from personal view of Richard Thaler of how rationality is now tempered with other social sciences to better understand economics.  You might have spotted Thaler in the movie, "The Big Short" as he explained to Selena Gomez some of the factors that caused the Great Recession.

Like other students Richard had been told that all economic behaviour is rational, but he started to notice anomalies that didn't make sense.  He felt that often behaviour was not logical and people did strange things.  He noticed poker playing friends would bet differently depending on whether they were losing and how close to going home.  The stock market is not always rational.  Studying the issues and allying himself with other economic doubters and other social scientists he eventually helped develop behavioural economics as a serious discipline.

One factor often overlooked by economists is self-control, although Adam Smith was aware of how a lack of self-control could distort spending and saving.  You already knew that as well.

Fairness is a human concept that doesn't always fit in with economic theory.  The most basic economic rule that most people are aware of is the rule of supply and demand.  The price goes down when supply goes up and the opposite when demand goes up.  This can lead to obvious complaints when merchants take advantage of sudden changes such as raising the price of for example snow shovels just after a big snowfall.  Economists would argue you could have bought a cheaper shovel in the summer, but many people prefer to wait unit the need is urgent.  The sense of fairness acts as a psychological constraint.

The National Football League draft can get emotional.  Rationally the author after a great deal of in depth research is convinced that for most of the time the first picks do not deliver as much value as the later picks.  Yet many deciders will trade away later picks to get one nearer the top.

A common occurrence at both business and households is a budget.  Always made with past information and often concedes mistakes as information changes.

An ongoing concern of the author as he moves from one institution and one collaborator to another is the reluctance of established economists to accept a behavioural factor.  Scientists of different disciplines often find it difficult to collaborate.  Psychologists and economics have different focuses, but gradually he finds sympathetic colleagues that approach the opportunity from different angles.

Today his findings are more acceptable in academia as well as business.  I think most people intuitively know that many decisions are made emotionally and salesmen are pretty adept at exploiting this fact.

He quotes Mark Twain, "It ain't what you don't know that gets you into trouble.  It's what you know for sure that just ain't so."  Richard Thaler noticed a few accepted things that weren't true.

An earlier book co-written with Cass Sunstein was recommended by British Prime Minister David Cameron To read an earlier review of Richard H Thaler's book, "Nudge" click here:  http://www.johnfdavidson.com/2016/01/can-nudge-help-you-make-better-decisions.html

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