According to economists, we should all be cold, clear-eyed spenders who always choose what would benefit us the most economically.
In their economists’ world, we are all as emotionless, passionless, and predictable as the Vulcan Mr. Spock in Star Trek, since we are supposedly programmed to aim for equilibrium and uniformity.
Still, do you know anyone (yourself included) who behaves that way, every time, and all the time?
I personally have not met that perpetual rational person—that Homo Economicus, or Econ—as yet.
In reality, we (e.g. me) are not always logical or consistent, nor do we behave in the manner that gives us the best bang for our bucks. Instead, we misbehave.
Now the challenge is that classic economists insist that human beings are Econs and hence base their theories on exactly that type of well-behaved Econs.
In order to achieve the same mathematical precision of hard sciences, economists have made a radically simplifying assumption that people are “rational optimizers” whose behaviors are as predictable as the speed of a physical body falling through space.
Unfortunately, that type of Econs can only be found in their imagination.
So, how can mainstream economic theories—based on that radical simplification— come close to the reality in the world around us?
The real world is made up of economics agents who are non–Econs, albeit humans.
Still, economic theories place Econs on the heart of all their equations. They insist on certainty and accuracy while ignoring human biases, blind spots, and lack of willpower—in other words, regular human behavior driven by feelings.
I am convinced that no amount of number-crunching or modelling can ever replace the need to confront the complexity of human existence.
The somewhat frightening aspect is that economists have increasingly become the “go-to experts” on every manner of business and public policy issues facing society, but they have not been accurate experts.
The economics profession has been in the doldrums of late—its leading practitioners failed to anticipate the financial tsunami that crashed over the global economy seven years ago, and its economists were out of touch—lost in their complex mathematical models that were built on highly unrealistic underlying assumptions—because they were hiding in their ivory towers of academia.
(If you would like to read more about their shortcomings, check out this post “Why Economist is one of the worst professions one could choose” or the more detailed version, 30 Observations why Economists underperfom).
An extreme version of their view held that stock market prices were always correct and hence speculative bubbles were the stuff of fantasy—like unicorns. I guess we know better by now.
The good news is that economists are warming to the view that the marriage of economics and psychology would produce smarter economic policies rather than relying on the traditional pristine mathematical models based on Econs alone.
So, in rides the white knight “Behavioral Economics” to our rescue.
In spite of the fact that this interdisciplinary field is only 30 years old, it has already begun to go mainstream. Evidenced by awarding Nobel Prizes to Daniel Kahneman and Robert J. Shiller (the poster child(ren) of Behavioral Economics/Finance ) in recent years.
Coupling recent discoveries in human psychology with a practical understanding of incentives and market behavior will help us to make smarter decisions in an increasingly mystifying world.
There are already some very interesting policy implications being implemented by “clever governments” that can make the world a better place.
For example: When people are behaving irrationally, a “prompted choice” (a fancy name for a nudge) can help. Because by presenting choices in a better way, people can make wiser decisions without losing their freedom of choice (by placing healthier food at eye level in canteens; by changing organ donation forms from opt-in to opt-out; by changing how people chose their pension contributions).
But to get back to answering the question in the title post, we misbehave so often because the standard settings in our human brain make us do it, making us fail to behave in-line with those “rational optimizers” invented by those traditional economists.
Now, that’s a bit of an anti-climax, isn’t it?
And I am very confident though that you don’t misbehave in other aspects of your life, those that are outside the domain of those traditional economists.
“Isn’t it strange—the same people who laugh at gypsy fortune tellers take economists seriously.” — Unknown
“Much of the ‘misbehaviour’ on Wall Street was/is perfectly rational from the bankers’ perspective: it earned them large bonuses.” — Unknown
Interested to read more on this topic of Behavioral Economics? Then, check out Richard Thaler’s latest book “Misbehaving: The Making of Behaviroal Economics“.