Monday, March 31, 2008

Behavioural Economics Wouldn't Break Adam Smith's Heart

Heidi Dawley writes in Media Life (popcult) HERE:

‘Simple fact is, we're fools with money’

‘We like to think we make rational buying decisions’

‘We as human beings are highly rational, and the belief we share in that rationality pervades our every thought and action across countless decisions each day, minor and major, from the $4 cup of latte we pick up on the way into the office to the really great deal we just got on our new flat screen TV, with free shipping.

Now here’s some disappointing news. That's all hooey.

This grand notion of rationality is entirely in our heads. In reality, we as humans are predictably irrational in our decision-making process, and that's proven over and over again by the poor buying decisions we make. We overpay, we buy things we don't need. And perhaps most discouraging, we never seem to learn from our mistakes.

In short, we're kidding ourselves about our ability to make rational buying decisions.

“The idea that we could compute all the possible options of every motion and decide what the optimal course of action is – I just think it’s inhumane,” says Dan Ariely, a behavioral economist at MIT and author of “Predictably Irrational: The Hidden Forces that Shape Our Decisions," a new book on how consumers really behave in the marketplace.

“We are just starting to understand that the reality that we experience is not just about what’s out there. It is about what we create.”

This of course hardly comes as news to marketers, whose very expertise is in persuading people not only to buy their products but to rest in the comfort that they made the wisest decision.

As a behavioral economist, Ariely looks beyond theory--say, Adam Smith's writings on capitalism and how it works or ought to work in the grand scheme of things, to how things actually work based on observing consumers in action.

It's enough to break Smith's heart, were he to return. A lot of Ariely’s experiments show just how much consumers are swayed by what they choose to believe versus the facts at hand. Call it willful self-deception. While believing they're weighing the evidence at hand, they often
reach back into memory--all those associations built up over years--to make decisions.”

Heidi Dawley should relax her language at least in reference to Dan Ariely’s research: ‘to break Smith's heart, were he to return' is part of the problem for modern economists attempting to cope with the burgeoning evidence that the belief in Homos Economicus is not founded in studying human behaviour, but more important it’s not something that Adam Smith believed in either, for which there is plenty of written evidence in his works.

In fact, it is a travesty of Adam Smith’s thinking to assert as many modern economists do that Wealth Of Nations is founded on ‘the granite of self-interest’ (George Stigler, Nobel prize-winner).

The popularity of Homo economicus among neoclassical economists, and apparently accepted by most of a mathematical disposition, has more to do with it being easier to model a maximization of self-interest for predictive purposes using calculus, but the predictions that are derived apply to the highly simplified and abstract construct at the root of the theory and not to any identified or identifiable human being out of six billion on the planet.


Post a Comment

<< Home