Dr Alain Samson’s Introduction to Behavioral Economics – Behavioral Science for Beginners
Behavioral economics (BE) uses psychological experimentation to develop theories about human decision making and has identified a range of biases as a result of the way people think and feel. BE is trying to change the way economists think about people’s perceptions of value and expressed preferences. According to BE, people are not always self-interested, benefits maximizing, and costs minimizing individuals with stable preferences—our thinking is subject to insufficient knowledge, feedback, and processing capability, which often involves uncertainty and is affected by the context in which we make decisions. Most of our choices are not the result of careful deliberation. We are influenced by readily available information in memory, automatically generated affect, and salient information in the environment. We also live in the moment, in that we tend to resist change, are poor predictors of future behavior, subject to distorted memory, and affected by physiological and emotional states. Finally, we are social animals with social preferences, such as those expressed in trust, reciprocity and fairness; we are susceptible to social norms and a need for self-consistency. Interdisciplinary Context The field of BE is situated in a larger landscape of social and behavioral sciences, including cognitive and social psychology, and developments in the domain of neuroscience have opened up promising avenues for BE informed by better understanding of the human brain (Camerer, Loewenstein, & Prelec, 2005). It has been argued that BE would benefit from greater connections with other behavioral sciences, such as anthropology, which may be particularly important for domains that incorporate human interaction, especially behavioral game theory (Gintis, 2009). In a related vein, psychologists interested in the evolutionary origins of phenomena studied by behavioral economists have investigated behavioral biases in monkeys (Lakshminarayanan, Chen, & Santos, 2011). Some evolutionary psychologists have challenged assumptions about the rationality that underlies BE, in that seemingly ‘irrational’ judgments and decisions may have been functionally adaptive in our ancestral environment. The use of heuristic shortcuts, for example, is an efficient means for humans to make use of limited knowledge and processing capabilities. According to Herbert Simon, people tend to make decisions by satisficing (a combination of sufficing and satisfying) rather than optimizing (Gigerenzer & Goldstein, 1996), where decisions are often simply good enough in light of the costs and constraints involved. Evolutionary perspectives have also been applied to decision framing, showing that framing effects in a classic ‘lives lost’ versus ‘lives saved’ risky decision problem can change with the number of lives at stake. An “irrational” risk preference reversal effect is present when 600 or 6000 are involved, but it disappears when the number is reduced to 6 or 60. The evolutionary view holds that our thinking patterns evolved in hunter-gatherer environments that involved small groups (Rode & Wang, 2000).