What is in fact behavioral economics? How is our economic understanding related to human behaviour? Nowadays, more people are beginning to change their reasoning from a ‘strictly mathematical’ point of view to a more ‘humanitarian’ one. Being it around the environment, human rights or the effect of advertising on consumerism, the human brain is evolving into a different stage. Since the 18th century, economics has created itself around theories founded on rational human behaviour. However, are we always that rational? It is taught that it is so.
In order to generalize and begin an understanding of an economic model we first simplify. We teach ourselves and each other that all decisions are in the best interest of the maker in hope for the best possible outcome. However, it is not taken into account rapid changes on our opportunity cost due to context and circumstances.
For example, when we go to the supermarket, the economic meaning for our decision on what to buy lies only our own affordability of the price, tastes and needs, even though we are influenced by our context. For instance, variations of our shopping list may occur if we go in on an empty stomach since we tend to buy more of what we need and other superfluous and not-thought-before goods. But that may only appear as a textbook footnote named ‘Assumptions’. Behavioral economics studies what is the mental process behind this reasoning and how can we predict it.
It is difficult to mathematically estimate the “percentage of irrationality” that is present on our personal and economic decisions. Nevertheless, it is remarkably easy to get a hold of the subsequent effects.
As Dan Ariely exposed in his book The Upside of Irrationality, human beings are very conscious of their own tendency to procrastinate, to put off decisions that are in their best interest.
Economically, in a perfectly rational world procrastination wouldn’t be a problem. By comparing short and long-term benefits the decision-making process would be obvious and unquestionable, we would follow the market models and operate accordingly to what was foreseen. Still, actual human actions have caused the implosion of Wall Street in 2008, bringing down entire markets because the financial market is man-made. Actual humans made the wrong, self-interested decisions that crashed the Venezuelan economy when the president and all associated government should be responsible for their people and should have followed what was in the country’s best interest.
More and more today we are acknowledging both the rational and the irrational of human behavior and decision-making in order to be able to better adjust economic predictions to the actual future stream of events. By analysing how all of us are influenced by irrationality, models are being reviewed and completed. Our assumptions on what rational model-acting humans think and do may not be, under most circumstances, are not wrong. However, the human brain is complex enough to turn the economic thinking around and make textbook decisions different from the real deal.