Behavioral economics and decision making

It is always dramatic and enjoyable to see the kinds of hand-picked examples and experimental results that we saw this week, but if there is any “surprise” in this week’s content I’d say it is that so many people today are still surprised by such examples and findings.  For me, the content is all fascinating stuff (and I really do love hearing the examples) but it is equally fascinating that behavioral economics has been mainstream for only such a short time.  Maybe I suffer from the curse of knowledge, but many of the relevant topics have been studied in psychology for as many as 100 years at this point.  Of course, while the amount of support collected over 100 years’ time is quite significant for the position that “the best predictor of future behavior is past behavior,” we can still do only a very poor job of actually predicting human behavior.  But all the same, each of us is very well aware that entire disciplines (marketing, advertising, public relations, sales and the like) exist for the purpose of influencing our behavior–and are quite successful at it.  To realize that the design of a DMV form would affect whether or not we declare ourselves to be organ donors should not be much of a stretch.

I’m a little bit confused about the levels of analysis and the kinds of things being studied in behavioral economics.  I always thought that traditional economics was concerned with a pretty narrow range of economic concepts (pricing, value, wealth, production, consumption, interest, profits, investment, returns, etc.), only the most overt human behaviors as they related to that set of concepts (how many hours you’d work at a certain rate of pay, could costs of production be maximized by employing x amount of people and y amount of machinery, etc.), and mainly the effects in the aggregate—especially with a focus on how markets and overall economic systems work (and not so much about the individual except for where understanding the non-existent “average individual” is critical to understanding the system).  So I’m having trouble figuring out why behavioral economists are interested in how people self-characterize the number of times per day they floss, how many flavors of jam they will sample, and whether contemplating the Ten Commandments would keep them from cheating at school.  It is probably that I am defining “economic” matters too narrowly or mistakenly thinking that they should just be directly studying what they want to know about (as opposed to studying something else—like cheating in school–that may lead them down a path or allow them to generalize findings to something that would be more germane to economics).  After all, in psychology behavior is defined broadly (it includes thoughts, feelings, decisions and overt actions) so economists should probably also be allowed to have a range of interests!

I’m also a bit confused about the rational and irrational thing.  As I already stated, I agree that these so-called irrational tendencies exist.  I also agree that is valuable to recognize that they exist because this information that can be put to use in any number of ways for good or evil purposes.  And I agree that I’d personally call at least some of them “irrational.” But in economics the definitions of rational and irrational are different.  And if these cognitive biases, mental blindspots and perceptual deficits are actual constraints that result from the hardwiring of the brain and the normal functioning of the mind, then economic decision making in which these factors come into play can still involve the reasoned type of thinking that traditional economists expect from econ-flavored people, yes?   It would just be that their reasoned cost-benefit analyses would be flawed based on “other” factors (namely, lack of capability) in much the same way that a reasoned analysis could still be flawed due to incomplete information.  I’d think the behavioral economics takeaway that most people’s intuitions are wrong about whether they will be influenced by different design factors could even be some sort of evidence that people do consciously go through a rational decision making process (in other words, I’d think that the reason that they think they are rational is that they know they intentionally reason through at least some of their decisions).

Anyway, the topics are fun but pretty intense.  I see this stuff all over the place in my own life.  For instance, I’ll see a tv commercial for a chain restaurant and identify several dishes I’d like to try.  When I actually go to the restaurant, I will really just order the same thing that I like.  This is something behavioral economists look at; we are wired to plan for the short term plus we express an interest for variety over the long term but each time we are in the situation it is a single event and we choose differently in that single instance then we would if dealing with a big-picture hypothetical or intention for the longer-term.  In fact, I am not a picky eater and have eaten and enjoyed many things that other Americans wouldn’t consider eating, but I am quite guilty of ordering exactly the same thing repeatedly across multiple visits to any given restaurant.  I also have a very close friend who is about as different from me as they come; she is actually the most irrational person I know in every area of her life and her behavior is full of items that I can have fun looking at through the behavioral economics lens (especially her behaviors around gambling and general handling of money).

I seem to be suffering from some sort of confirmation bias because I now see things that are relevant to behavioral economics everywhere I look!  I spend a lot of time on the internet each day and follow tons of blogs dealing with a variety of topics and fields, so I get turned on to a lot of random stuff that other people have found interesting.  I didn’t realize that the Pope is interested in economics.  I think it is creepy that the government would pay kids not to get pregnant; I also think it is scary that the government can think it is better to take away the possibility that we will make what they consider to be a bad choice than to give us better information and accept the choice we do make.  And it is very easy to see that Google directly applies at least some of the same things in their product development process that the psychologists and behavioral economists have uncovered and continue to study: people don’t actually know very well what they want, need, or do—but watch them and you can see for yourself.

I hope that the topic of situation and context will come up at some point because the effects on behavior are profound.  Situations are complex, changeable, hard to predict and highly variable so that is part of the reason why it is so hard to predict behavior.  I also think that motivation is important and I’m pretty sure that some studies have shown that sustained intention impacts behavior.  Those kinds of patterns are more interesting to me than the mathematics of the full-blown economic models.  When this class is over I doubt that I’ll remember what Prospect Theory is, but I’ll probably remember the disposition effect and endowment effect (even though I won’t remember what they are called).