[1] I am definitely a Human rather than an econ.  Typically my decisions are made by gut reactions mainly because I feel there are usually unforeseen and unknowable factors that will influence the desirability of the effects of the decision. My karma more than my ability to analyze will determine whether my decision leads to good results. If you were a real estate agent in down town Hiroshima in July 1945 – no matter what mode of analysis you used in deciding whether to buy a property in the downtown area you would not likely have factored in the atomic explosion next month.

[2] The default choices of my university’s teacher certification program seem to be adjusted to induce a maximum tuition payment from the students.  The set of defaults functions to extract the maximum possible resources from the students and transfer them to the college of education. As I interpret the system functions, the college benefits at the direct expense of the future teachers and the indirect expense of the students in the public schools who will be taught by the teachers certified by the college of education. Ironically this may form a positive feedback loop to enhance the flow of resources to the college of education. By extracting from students instead of enhancing students the college certifies students poorly prepared to improve conditions. This can help the college in two ways. First it encourages the teachers to return to the college for advanced ineffective training and it allows the college to demand even more resources from teachers in undergraduate training in exchange for even more less effective training to be certified.  In an environment that promotes blaming the victims, of the system (the students in the public schools),  it is not likely a competitive system of teacher education will arise or that there will be a perceived need to reform the college that is so effective in extracting resources from student teachers.

[3] The rationality of the decisions of the bankers et al. would be relative to the context of the decision when it was made and expectations of the decision maker and her/his peers as to the duration of the determining contexts into the future.  Perhaps rationality is a fuzzy quality and greed in many cases entered into the equation in a way that the banker et al. felt they were producing an optimum good at least in the short term and no one and nothing required that they consider the long term.

1.In general, I’m spontaneous and anxious.  However, I can say the my anxiety and spontaneity differ depending on high involvement purchases, those in which I put more thought, time and energy into, and low involvement purchases, those in which not much thought is put into. I can assure spending a comparably significant amount of time planning a trip to Brazil than planning the purchase of a bar of body soap. For the latter, I don’t focus on benefit, but on cost (mostly buying the cheaper item) as I believe benefit, when dealing with homogeneous items, don’t differ much from product to product. On the other hand, while planning a trip to Brazil, I focused more on benefit than cost; the benefit of not having to stay overnight elsewhere, the benefit of flying direct, and so forth. Of course both had and have their constraints: time, money, level of necessity, emotions, but on different levels. Moreover, these are constraints that come with all types of decisions.
Overall, I can’t say I have stopped to analyze my decision making process to the “t”, (which might make me more human than ecom in general terms) but I believe the best way is to limit ones constraints as possible (for example, if traveling book and buy ahead of time) and make use of time available to research. Information can influence the process.

2.    Being around kids frequently, I tend to find myself having lunch at McDonalds quite a bit each month. As it has been one of their great marketing tools to pull kids in, the “Happy Meal” toys are always more craved than the actual bland “Happy Meal” itself. I once took a group of my little friends for lunch and once it was time to order, without hesitation, they all asked for the “Happy Meal” since they couldn’t leave without adding another Ben 10 McDonalds toy to their collection. Funny though, most of them hardly eat their meal and others ordered apart from what was offered, obviously having to pay more than originally bargained for. If one opted to purchase the “Happy Meal” toy without the meal, the price wouldn’t alter hence not making the latter a wise choice.

In terms of feedback, I see it as an opportunity. It creates awareness, making situation a bit more transparent  and triggers new ideas.

3.    According to Wikipedia, a homo economicus or an economic human is that whom is rational, broadly self-interested and has the ability to make judgments towards their subjectively defined ends.
Looking into the financial crisis it is evident that all involved parties were stimulated by financial gain (self- interested characteristic) which would be their defined end, but further examining the definition of the economic human we can see, to a point, how those involved didn’t have the ability to make judgments towards their subjective goals. All parties were interested in the same results, wealth, but weren’t capable of “judging the comparative efficacy of means for obtaining that end.”
From the borrower’s side their knowledge was basically limited to the information and options provided by the bank, precisely turning the bank into their judges. If the definition to on the economic human were to apply, the borrowers would have forseen the results considering risk. Hence, accurate forecasting, an ability they are to have, would have deterred borrowing in many cases or under many circumstances.
As for the lenders, they too were acting to maximize their wealth, but were overly affected by greed to possibly account for the number of default borrowers and though such borrowers were detected, there was no “rational” behavior, whatever that may have been, to  minimize loss, only to have the whole system itself collapse.

To date, the systematic, robotic way of thinking has worked out well for me.  While some situations in my life would probably have benefited from more intuitive/emotional thinking, the pragmatic, logical way has steered me in a way that I have found fulfilling, exciting, and true to economic thought, efficient. Since the fundamentals of the system has been ingrained for quite some time, I have noticed lately that while some situations would/should require a softer, less rigid approach, the systemic autopilot kicks in and guides me.

2. Can you think about ways in which default choices have influenced you? Can you think of a way to change a default option that you might encounter in the world (401k plans, etc.) to yield better outcomes? Can you think of a way having more feedback can help you (or others) make better decisions?

(more…)

1. Think about times in which you’ve made decisions: what school to attend, what job to take, what kind of car to buy, what to eat for dinner, who to spend your time with, who to date, etc. Now think about how you made those decisions. Do you rely on your gut/intuition or are you more likely to consciously and systematically weight the costs and benefits of your choices? Do different decisions warrant different decision-making styles? Which style of decision-making seems to yield the best results for you? Are you more of an econ or human in general?

Definitely I am a human in decision making, with emotional aspects of decisions having a lot of impact, but I think that primarily I am making decisions based on my personality profile, which is rather static, than the particular emotional content of the decision point. In career choice, for instance — I am currently an administrative coordinator in an academic setting — I have tended toward positions that maximize my talents for supporting the work of organizations by sharing information, by attending to particular ongoing and ad hoc organizational needs, and by providing knowledge and insight to facilitate the choices of others. My training, on the other hand, is in rehabilitation counseling, a profession that I do not practice for economic reasons — in order to pursue it as a career, I would have to take a rather substantial cut in pay. Currently I teach a pre-med section of our University 101 class and one of the required assignments for my students is to write “problem-solving” reports based on a decision-making framework which I provide to my students at the initial class session. The hope is that by using the framework to solve current problems they will improve their “critical thinking” skills and be less likely to make choices that will harm them. The irony is that I seldom consciously use this type of process in my own decision making, especially in situations that affect my economic stability.

I am a collector, on a minor scale, of musical instruments, books and small handcarved artifacts, and a major justification (in my mind) of making these purchases rather than investing in my savings plan or deferred compensation opportunties is that these items all have value, which is likely to increase, and which I can liquidate at some later date. Every so often I prove this to myself by selling one or two of my books — many of which are purchased second-hand for trifling amounts (.50 to $1) for handsome prices on EBay. For instance, one two-volume set of a biographical history of South Carolina public figures cost me $2 and I sold it for $250 — a terrific rate of return on investment! Unfortunately, these sales are few and far between and my collections currently threaten to overtake my available space. They will likely constitute a burdensome inheritance for my son when I pass on.

The current economic crisis should have had some impact on my economic decision making on a broad scale, but seems to return only small scale influences — whether to buy or bring lunch, clip coupons, or cut back on my small charitable donations.

A point made by Thaler seems very relevant to this discrepancy between what one knows to be in one’s interest and what one actually undertakes — we will tend to make the easy and obvious choices. Complicated frameworks for decision making that require a great deal of rational evaluation and, at times, esoteric knowledge, will tend to be either put off or made by default.

2. Can you think about ways in which default choices have influenced you? Can you think of a way to change a default option that you might encounter in the world (401k plans, etc.) to yield better outcomes? Can you think of a way having more feedback can help you (or others) make better decisions?

As an employee of a state university system, I was enrolled by default in the standard retirement savings plan upon initial employment. I have not re-examined that choice in over 15 years, except to briefly consider pursuing a small contribution to a deferred compensation plan (rationale being that, if I receive a raise in pay I should apply the increase to deferred compensation and continue to operate on my current income, thereby increasing my savings without much discomfort. If this had been a default for me, I would not have objected and would currently have substantially increased savings, but, because it required positive action on my part, it never happened. Possibly having a “what if” option for exploring the outcome of choosing a particular deferred compensation amount would have pushed me to decide in favor of this step. Reality is that I could have determined this for myself by exploring the free savings calculators available and looking at potential accumulations with varying interest rates of return. Too lazy!!!

3. Think about the current economic crisis. Do you think all the people involved in creating this situation (bankers, lenders, home buyers, etc.) were making “rational” decisions? That is, were they accurately weighing the costs and benefits of their decisions at every point?

It depends upon how much of a cushion the decision makers had in terms of their personal wealth. If one is compensated at an extremely high level, then one does not anticipate being terribly uncomfortable, even if decisions can result in income loss. Risk is less painful. The small players — the basement shop mortgage pushers — also were less risk averse because they had the opportunity to “score big” and were enticed by the prospect of tremendous gain. What is perplexing is the failure of those at the mid-range local level — bankers and mortgage lenders who are community based and whose fortunes are tied very much to the economic well being of their communities. Why they did not object strenuously to the ridiculous inflation of values on the one hand and the stupidly risky approval of loans to totally unqualified buyers is a mystery. The practice of “bundling” and selling off of mortgage “products” disconnected these folks from the immediacy of the risk to their institutions, but they must in some way have known how unsound these practices would be in the long run. The foolishness of the unqualified homebuyers, I believe, was augmented by their dependence on those they viewed as more expert — the people selling them sub-prime mortgages. Without an objective, third-party evaluative resource, they made extremely bad decisions to overextend themselves.

Information is power — we all have much more access to information resources, but are much less able to effectively evaluate the information underlying good economic choices.

1.   I can easily fess up to being a human rather than an econ (although I do still tend to think I am more rational than most, which is probably what most other people also think about the way they personally operate).  Compared to those around me, I do put a lot of time into researching issues and creating an array of options when a major decision is at stake.  A decision would probably reach this high stakes status in my book when it involves commitment of substantial resources or potentially profound or far-reaching consequences are anticipated (in terms of the effect of my decision on others or on life-sized issues like my career trajectory).  However, the starting point—determining right off the bat how much effort and which supporting activities are justified—is very much a judgment call.  I cannot tell you which would (or does) result in better decisions or how accurate a reality my perception as reported here actually is, but I personally think that some of the instinctual judgments I use probably have a rational but unconscious component (or whatever the unconscious equivalent of rationality is) and some of what I think of as rational and conscious is probably also affected by my values and attitudes in ways I have not reflected on.

2.  I know that I personally will default to a candy bar in checkout over a healthier snack because there is a wide variety of candy available there but no healthy options; candy is the default and so choosing one among the many is somehow reasonable.  Likewise, I am impacted by sale pricing, economy sizes, attractive packaging and other differentiators that probably really do not matter much when the decision is trivial or something about which I simply have no real opinion; my default becomes the bigger sized and more expensive product I do not need because it is a better value or the package that “looks” like it contains something good when I know nothing about the available array.  A great default option required by law is the inclusion of standardized nutritional information on food packaging but requiring placement on the front side of packaging in a larger more easily readable font size with a certified overall 1-10 healthiness rating would probably influence the number of people that actually defaulted to healthier choices.  Feedback on the label on the candy bar in the checkout stamped “equals 1 extra pound on the bathroom scale tomorrow” would help me make a better decision because it tells me what it will do to me.  Feedback of different types raises awareness on a number of fronts that can ultimately impact your intentions and non-cognitive behaviors—awareness that you are actually involved in a choice situation, awareness that more than one option exists, awareness of the likely outcomes of different choices, the amount of control you have over outcomes, etc.  Dan Ariely’s TED Talk on rationality has great examples.

3.  Were the people that created our economic crisis acting rationally?  Yes and no.  Humans are fallible and they were probably trying but were not great at making the best and most completely rational decisions.  You can only be so accurate in weighing costs and benefits.  You can only be so accurate in predicting an uncertain future and the outcomes of behaviors you have not yet taken.  You can only be so accurate in identifying societal needs or assessing the outcomes of any behavior multiplied hundreds of thousands of times over and predicting the ramifications of those behaviors on such a grand scale.  There is also probably something in between complete self-interest and complete rationality.  The problem of the very existence of competing interests and goals is a huge factor that must get in the way regardless of one’s intentions.  If the teeter-totter goes in several directions and involves balancing the self-interest of the mortgage salesperson with the interests of his employing institution and the consumer and society and the economies of this country and the world…It is simply too much to think about; short circuits in decision making will occur, shortcuts will be taken in the morality department and judgments will be affected.  A completely rational decision is not possible because you cannot get your head around all of the variables and know everything there is to know about the situation.

Assignment:

1.       Think about times in which you’ve made decisions: what school to attend, what job to take, what kind of car to buy, what to eat for dinner, who to spend your time with, who to date, etc. Now think about how you made those decisions. Do you rely on your gut/intuition or are you more likely to consciously and systematically weight the costs and benefits of your choices? Do different decisions warrant different decision-making styles? Which style of decision-making seems to yield the best results for you? Are you more of an econ or human in general?

The decision-making approach has depended on the situation and the perceived consequences, e.g., choosing to participate in a start-up required a bit more up-front analysis than arranging a date.  Regardless of the degree of analytical rigor, all of the decisions included a healthy dose of “gut feel” or intuition.  As intuition stems from one’s accumulated knowledge and experience, it may be that it includes an element of a subconscious cost/benefit analysis.

Different decisions warrant, or lend themselves, to different decision-making approaches.  Where quantitative information can be called upon as a component of a decision (e.g., acquiring a mortgage given a certain down payment, known salary, and probability of continuing employment), it certainly makes sense to run the numbers.  In other situations however, such quantitative information may be sparse or completely lacking.  In such a case, relying on intuition as a decision-making tool may be appropriate, especially if the situation is a domain in which the individual has significant experience.  In my case, the use of both analytical rigor (where possible) combined with an intuitive feel for the situation has served me well over the years.

In general, I’m large part human with an element of econ as a sanity check. 

2.       Can you think about ways in which default choices have influenced you? Can you think of a way to change a default option that you might encounter in the world (401k plans, etc.) to yield better outcomes? Can you think of a way having more feedback can help you (or others) make better decisions?

I’d guess the prescription drug component of my health plan is based on a default choice.  Upon receiving a prescription, the plan offers a generic drug (assuming it’s available) at 100 percent reimbursement.  I have the option of selecting a name brand alternative, but at a much higher out-of-pocket cost. 

One that I’m not sure of, but I’ll throw it out here is making air travel reservations and having the airline select my seat (the default choice in lieu of paying a fee to select one).  Having taken the default choice twice and ending up in middle seats on jam-packed flights, my perception of the fee went from one of “extravagance” to it being nominal.  In this case, the default choice was certainly behavior changing for seat selection on subsequent flights.

Interestingly there was proposed legislation in my state to that aimed to change the default choice for organ donation.  Presently one must opt-in to become an organ donor.  Despite an opt-in process consisting of nothing more than checking a box on a driver’s license application, relatively few participated.  To increase the pool of potential organ donors, legislators proposed that driver’s license applicants be automatically enrolled as donors, with non-participation requiring an opt out action (again, simply checking the box on the application).  As far as I recall, the legislation stalled in committee on religious and privacy concerns, but it seems a good example.
 
When going to the dentist, office staff routinely schedule a subsequent (6-month) check up before leaving the office; I’ve not missed a check up in years.  Now contrast this with my medical check up.  Upon reaching the ripe old age when increased testing is warranted (e.g., colonoscopy, among others), I was handed a script to arrange such testing on my own; several years later I had the procedure.  There’s no doubt that if the default choice was automatic scheduling of the procedure by my physician, I would have had the test earlier. 

Working in educational technology field, identifying ways to “nudge” students to both take control of their learning and doing so at the appropriate time.  Providing not only salient real-time clues as to their performance (e.g., in-your-face displays of recent assessment results), but also suggestions as to what they need to study and when, is so far (at least anecdotally), improving student outcomes.

 3.       Think about the current economic crisis. Do you think all the people involved in creating this situation (bankers, lenders, home buyers, etc.) were making “rational” decisions? That is, were they accurately weighing the costs and benefits of their decisions at every point?

The question should be viewed as making “rational” decisions toward what goal. For example, the banker or mortgage lender choosing to engage in “risky” behavior (e.g., investing heavily in derivatives; making loans to less-than qualified individuals) with the objective of maximizing his or her compensation is behaving quite rationally.  The cost/benefit analysis, viewed from the individual’s perspective, is perfectly reasonable, particularly if the only consequence for not behaving in this way is a possible loss of income.  If, on the other hand, individual goals (and compensation) were in some way aligned with that of the firm (e.g., maximizing revenue while maintaining an acceptable level of risk, however measured), the cost/benefit equation analysis could be quite different and engaging in riskier behavior might not be rational.

Home buyers (those knowingly overextended from the get go) do not seem as rational.  While it can be argued that seemingly ever-increasing home prices made the idea of making a “quick buck” a reasonable goal, the home buyer, unlike the banker or lender, had a known and quantifiable downside risk.  It would appear that many who became real estate “investors” during the housing run up simply ignored this risk.

1. Think about times in which you’ve made decisions: what school to attend, what job to take, what kind of car to buy, what to eat for dinner, who to spend your time with, who to date, etc. Now think about how you made those decisions. Do you rely on your gut/intuition or are you more likely to consciously and systematically weight the costs and benefits of your choices? Do different decisions warrant different decision-making styles? Which style of decision-making seems to yield the best results for you? Are you more of an econ or human in general?

If I have been completely rational the past decade, then I may already be on my third Ph.D., have tenure at our national university,  have a consultancy on the side and maybe a theorem or two in my name. By my standards, I should have been maximizing opportunities, minimizing costs, and blazing through whatever challenges thrown at me. Knowing this wouldn’t undermine my present circumstances though; I’m happy and I still haven’t lost my determination to pursue anything of value.

However, this lack of systematic analysis of costs and benefits doesn’t touch how I pick my next digital device. For example, it took me 4 months of intensive canvassing, online review reading, and store-testing to finally pick my HP Mini 2140. The fruit of a dozen comparisons and tables of pros and cons, I finally picked my most-used thingamajig next to my mobile phone. I’m happy too.

It’s easy to see that the way I make decisions depends on the situation I’m in, and the scope I attribute to it. Life choices most commonly are a function of whatever I’m passionate about. In this case, since I’m really into understanding what makes people tick and having my own diagnostic practice, I doesn’t really matter if I get detours along the way; I only have one destination. On the other hand, something as limited as choosing a gadget can be such an obsessive-compulsive exercise of decision-making because, well the options are too many and the most realistic thing is to limit those options to one. (If I’m rich, well, that may be a different story)

Now, could anyone predict my actions based on my previous decisions? If I’m observing myself from another person’s standpoint, then it would require at least some observational measures to create a suitable found function that could predict the consequence of all my future actions. In other cases, I could easily be modeled under a computer simulation, at least if limiting the prediction to only a few tangential decision paths.

2. Can you think about ways in which default choices have influenced you? Can you think of a way to change a default option that you might encounter in the world (401k plans, etc.) to yield better outcomes? Can you think of a way having more feedback can help you (or others) make better decisions?

Choosing by default can be a decision based on self-interested, rational explanations (it jus so happens that it’s the best thing out there), present-aim, rational explanations (it so happens that it’s according to my “taste” or preferences), or I’m just a lazy bum. I believe that’s the design philosophy of rules in general: they don’t require you to think. But knowing that rules are made this way, obviously it wouldn’t prevent a person from thinking out of its scope.

So in the case of the any kind of default option, culture-bound, social status-bound or any other kind of constricting factor, I believe that one always has the choice to think otherwise. That’s the way I view it, even if I’m a behaviorist when it comes to practice, I’m still a humanist through and through; people can have choices. With this notion, the possible solution space can be expanded for each individual, at least, if opportunity exists for that person to exercise those choices.

Opportunity is the other characteristic of human decision-making that we have to consider because it’s not all about having choices, it’s how decisions can be put to practical use. Deciding to become president, for example, is quite okay, but how could one go on about doing it? We could give opportunity or we could make people realize that there are opportunities, and this, I believe is the optimum way to make better decisions.

I give a greater weight on giving opportunities because I believe that people should have the right to explore their decisions risk-free. Of course, this should be under the understanding that people’s rights wouldn’t be violated, and that the free will of individuals wouldn’t be compromised. This is just akin to the constructivist leanings of Piaget and Bandura: since we recreate the world according to our experience, then it makes sense to provide us with lots of experiences.

3. Think about the current economic crisis. Do you think all the people involved in creating this situation (bankers, lenders, home buyers, etc.) were making “rational” decisions? That is, were they accurately weighing the costs and benefits of their decisions at every point?

Yes, I do believe that they believe they are acting “rationally” even up to the tipping point of recession. They could probably explain the steps they did to formulate such actions and determine the pathways for each decision they did. But as it goes, internal consistence that not necessarily mean outward validity. In short, they may believe they are right but they’re just flat-out wrong.

I say ‘wrong’ in this particular circumstance because it’s an irony in great proportions: what was deemed optimum for greatest positive impact had created the most negative result and everyone is paying for it. And by ‘everyone’, I’m referring to its global scope. We could probably analyze the decisions that they made the past decade, but that would be moot and academic. What we need is actually a more innovative approach more consistent with what’s really happening – the thesis of behavioral economics.

Of course, one thing that behavioral economics needs to strengthen is its capacity to predict outcomes of larger scopes. Though some things such as the recession could be explained by determining the actions of individuals, and then analyzing the statistics inherent in such an exercise, it only serves to explain by hindsight and may be crippled as to its prediction power for the general population. This is something that I would like to explore more in the course of my studies, and one thing that I’d like to prove otherwise.

1. Think about times in which you’ve made decisions . . ..  Are you more of an econ or human in general?

In the fall of 1990, I stated taking university classes, about nine months after I had bought my first computer (a PC) and dot matrix printer.  I immediately was struck with Mac envy as all the Macs users in class had post-script printers with much greater resolution.  The documents were beautiful, not more legible, not better worded, just beautiful.  It paved the way for a Mac purchase as soon as I could.  It was more expensive, but I wanted beautiful documents.

Well, PCs got better, and cheaper.  I went back to the PC world.  I even spend a sizable sum to pick up a toshiba tablet because I wanted to experiment with alternate input methods and with developing a better platform for a mobile personal learning environment.  It was after my tablet died that I started looking at Macs again.  The Mac Air had been out for about six months.  I walked into an Apple Store considering a range of products.  But again, it was the aesthetics not the functionality that struck me.  I could have bought a cheaper model, but the Air had a look and a certain feel beneath your fingers.  I was persuaded by the machine itself to plunk down another $800 (USD) for that Air instead of a straight Macbook.

Am I an Econ, I think not!  It’s not that rationality is not part of the economic process for me, but I sense a large range of cognition.  Frequently I find myself making decisions that are driven to some extent by emotion, with a follow up period of rationalizing to find a justification.

Question 2 . . . ways in which default choices have influenced you?

Oh, I am a classic example if you wanted to advocate for automatically enrolling people in 401k plans.  I did not enroll after becoming eligible for a full year in not one, but in my first two jobs.  I kept saying to myself, “yea, I really got to get over to personnel and get that done”.  I mean, I knew it was free money, but it was out of my sight and out of my mind, except for when I wasn’t anywhere near the human resource department.  I could chalk it up to attention deficit disorder, but I understand that ADD is a little too common when it come to 401k plan enrollment.

Question 2a. Can you think of a way having more feedback can help you (or others) make better decisions?

A number of my previous job contained a yearly review component.  I would make goals for myself with a supervisor, then 11 months later I would try to figure how to justify that I had done something before my next review.  No one really believed in the process, it was just something that had to be done.  Yet, it could be a real opportunity for people if the overall process could be improved.

Part of the reason I believe that this type of thing occurs is that the review process is conceived more as a bootstrapping process than an educational process.  Education is being recognized as an important part of work life and lifelong learning.  Reconceived as an educational process, complete with relevant resources and fully integrated into work processes, a review process can be much more effective and engaging to the recipients.

Question 3. Think about the current economic crisis.

I believe that behavioral economics has important insights for all actors, but I also believe that this crises is primarily a crises of policy and the failure of neoclassical theory in policy.

(1) There was evidence of a housing bubble, but if that bubble was to burst, was there anything else in the economy to grow on?  The depth of this recession seems to say that there was not anything else there.  I also don’t think there was enough emphasis on stability and too much emphasis on wealth creation.  Lower housing costs would had directly reduced much of the country’s wealth, something that did happen in a big way when the bubble burst.  Housing is an expense; a place to live.  Mixing it up with wealth creation proved to be problematic.

(2) Neoclassical theory, as it seemed to be practiced, was too simple.  Behavioral economics might be a way of allowing for much more theoretical complexity.  There is no reason to say the economic man is arational, only that there is much more involved than reason can explain.  Consider the following from the assigned reading:

The rational expectations hypothesis (REH), asserted that a market economy should be viewed as a mechanical system that is governed, like a physical system, by clearly-defined economic laws which are immutable and universally understood. (Thoma)

In many ways economics (like many other social sciences) seems to suffer from physics envy; the idea that social systems will behave predictably because they are governed by simple laws analogous to those found in Newtonian physics. Reality seems to be much more complex, filled with emotions and all kinds of social influences.  While many economist and policy makers were considering the strength of rationality in markets, entire marketing campaigns were built on the power of emotionally inspired desire.   The result, impossible mortgage terms, impossibly high credit card debt and zero savings.

Reasons are often imperfect and can be outright wrong.  Even if markets do have better information than individuals, it still does not mean they have the right information.  It’s easy to jump on the bandwagon just before it rolls off the cliff if everyone onboard is nearsighted.

1. Think about times in which you’ve made decisions: what school to attend, what job to take, what kind of car to buy, what to eat for dinner, who to spend your time with, who to date, etc. Now think about how you made those decisions. Do you rely on your gut/intuition or are you more likely to consciously and systematically weight the costs and benefits of your choices? Do different decisions warrant different decision-making styles? Which style of decision-making seems to yield the best results for you? Are you more of an econ or human in general?

When making decisions which have a wide range of possible choices, I think I use costs and benefits first to get down to a manageable set of realistic options. For example, in terms of a selecting a new job, proximity to where I live, my relevant experience, my longer term career aspirations, salary range will discount the vast majority of options and leave a set for deeper consideration.

From this point on gut and intuition play a large part. Intuition is a function of an individual’s experiences of situations and outcomes that have been played out in the past. For example, when buying a car with a suspiciously low price, I will use my intuition across multiple vectors to determine why this might be – for example, an assessment of the seller by analysing how certain questions are answered (is he unaware of the value) along with an assessment of the and the vehicle and it’s service history combined with my own personal experiences of buying which may or may not of turned out positively in the past.

I wonder whether intuition is considered “human” behavior rather than econ due to the complex and individual weightings we subconsciously put on different vectors depending on our own past experiences. Combined with our personal profile of aspiration, ethics and attitude to risk, which will be different for every individual, means that two humans with the same control experiences can plausibly reach a different choice.

As it is often difficult for a human to relay back the exact path describing the rationality of their choice (i.e. there are too many subconscious but influencing elements, “I  had a ) we label the behaviour human and not econ. However, does this mean that the choice was not rational?

The same unexplainable yet rational path could be applied to a person’s dating choices – past experiences will be a conscious and subconscious influence – but so will biological factors that might not be easily explained by the individual, thus considered “human”.

Finally there may be elements of one person’s rationality model that the next person may see as irrational or crazy, for example sexist or xenophobic attitudes. However, by subjectively taking into account an individual’s assessment of what they consider as rational, you can usually rationally explain the decisions they have taken.

2. Can you think about ways in which default choices have influenced you? Can you think of a way to change a default option that you might encounter in the world (401k plans, etc.) to yield better outcomes? Can you think of a way having more feedback can help you (or others) make better decisions?

In the UK, I would consider many see the decision to enter higher education and earn a University undergraduate degree is the “social” default for young people seeking to pursue a professional career. Encouraged by employers, government and parents, more than 40% of high school leavers now opt for this route. This was the path I took to my first job, although I see with the benefit of hindsight many equivalent and potentially better routes to where I am today that would not have required the acceptance of the default choice.

An example (not from my personal domain): In the UK one can become a lawyer through the work experience route, even if the individual leaves secondary education early. The social default remains going to University and then on to law school, but it is possible to work your way up from junior positions and study legal exams in your own time (often supported by your employer). This choice is often taken later in life by those who didn’t have the confidence to excel in formal education or had latent potential that for some reason professional education could not unlock. Perhaps their learning style fits better with the vocational environment. Feedback (in this case probably not positive) during their early educational careers could have influenced some to discount the default route in this scenario, however others may have decided on their own terms that the default route was not for them.

The decision to self-study or study through work yields a better outcome for these individuals than the default choice, which might have led them to drop out of University and discount a career they could have been successful in.

3. Think about the current economic crisis. Do you think all the people involved in creating this situation (bankers, lenders, home buyers, etc.) were making “rational” decisions? That is, were they accurately weighing the costs and benefits of their decisions at every point?

Homo Economicus is defined as:

…an approximation or model of Homo sapiens that acts to obtain the highest possible well-being for himself given available information about opportunities and other constraints

(http://en.wikipedia.org/wiki/Homo_economicus, accessed 19th Sept 2009)

The current economic crisis was perpetuated by systems designed to encouraged all actors to maximise their own material wealth over the short term against all costs. The constraints did not take into account the long term welfare of direct actors or other parties effected by the events in the system. Human factors such as consideration of ethics were actively  designed out of the DNA of the economic environment, eventually leading to its downfall.

For example, bankers in systems that were too large to fail were rewarded huge bonuses for short term gain with no long term accountability for the decisions they were taking on behalf of their clients. The sub prime mortgage ecosystem encouraged, incentivised and embraced the knock, sell and run sales methodologies that caused huge levels of defaults without consequence to the advising sales agent. Greed on the part of the investors and borrowers added to the cyclical effect.

The issue here is that the people who set the rules created functionally flawed parameters leading to the creation of opportunities that limited the scope of rational choice on the part of the actors in this ecosystem. As certain factors such as long-term security, continued liquidity of the credit system and sustainability were taken as givens, these vectors were removed from the system of rational choice the actors operated over. Faced with operating within these parameters, actors did make rational choices, weighing up cost and benefits against a flawed model with incorrect assumptions. Acting as Homo Economicus, their choices were rational but ultimately proved to be incorrect, as predicted by a limited quantity of “human” onlookers.