Real Human Behavior: Economists' Voldemort

Economists sometimes get criticized for misunderstanding human psychology and behavior, and there is a good reason for that. Conventional economics assumes that people behave rationally and ignores a lot of aspects of real human behavior. The subjects that they describe in theories are often referred to as "homo economicus", not us homo sapiens. You always have to hear phrases like "as if" and "in reality" in economics classes, because those "theories" contradict with the real world and real human behavior. 

One of the mistakes in economics is that it thinks people are forward looking. In economics, we simply assume that people can easily decide whether to consume today, or to substitute today's consumption with future consumption. If we decide to consume now, then the price of that consumption would be the original price plus interest (and perhaps inflation too). If you have decided to buy that bag ($80), you are basing your decision at the real cost of $82 of next year (and $85 of two years later, etc.) of which $2 would be the interest you earn if you had put it into investment (here we neglect inflation). Who actually thinks about that when they consume? How many base their consumption decisions on how they could use the money in the future, let alone thinking about potential interest or inflation? Most of us at most the time, we just think about whether we like the product/service, whether we need/want it and whether it is worth the price, and perhaps what else we could buy with that money (opportunity cost).

Another mistake we make in economics ties to the last one: we ignore human's limited willpower. Even if we know that the price of today's consumption is the interest that we could have earned, we know what the interest would be, and let us even assume that we can predict what the inflation would be, people would still not make decisions solely based on that. Consumption is not like a switch we can easily turn on and off. We do not easily stop ourselves from buying things by saying to ourselves, "I am going to buy a car/a house/start a business, so let me not buy this and save the money for that." We just go ahead and swipe that credit card because the joy of that right-now-right-here consumption is so tempting! 

Humans are short-sighted because today's consumption and joy are much bigger than that of a year later. Why else do we fail to save for the future when our income allows us to? Why else would we procrastinate? Why else would we binge watching Netflix/Hulu/Youtube when we have more important things to do? Why else would we be obese? But in economic classes, we can somehow talk about consumption all the time without talking about willpower, self-control or impulse. 

Another mistake in economics is that it overestimates how rational and informed we are, or should I say, it assumes that we are such. How products/services are packaged or framed is totally irrelevant, because we are assumed to be rational. If your main objective is to buy a delicious chocolate bar or a tub of butter, the appearance of the package would not matter at all. But the fact is: it matters a great deal. The color of the package, the pictures on it, etc. are what we look at first and that affects and almost determines whether we want to buy that or not. Psychologists, those who work in marketing and those who design products know that very well. Also, we would not eat until we throw up because that would be a sunk cost fallacy.

When we talk about consumption in conventional economics, we simply think that people would maximize their utility. But the problem is that we don't. Why? Because of all the above. Even as a person who gets complimented for his rationality and good cost-benefit analysis, I still make bad consumption decisions that make me worse off.

This is why I appreciate the establishment of behavioral economics. In conventional economics, real human behavior and psychology are like Voldemort. But behavioral economics does not assume people are rational. It studies our behaviors using empirical evidence, often incorporating studies from psychology. In fact, economics started off quite behavioral at first. Richard Thaler pointed out in his book Misbehaving that, Adam Smith said in his book that "the pleasure which we are to enjoy ten years hence, interests us so little in comparison with that which we may enjoy to-day". (p.88)

There are many economic theories that describe and predict the behaviors of what many call "homo economicus". I would say that such a rational creature cannot even be a "homo" species. I think those economists were studying the creature of another planet, just to prepare us to migrate there. The problem is, they probably would not welcome us there, since we are simply a huge mess in there eyes.

It would really benefit economists to study a bit of psychology, neuroscience and evolution theory (which really is a "theory" in the scientific sense).

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Is it Okay Not to Vote?

Tomorrow is the day for the midterm election in the U.S. You hear people calling other people to vote no matter what. If you are an American citizen and you do not vote, you just do not love your country, or at the very least, you are not fulfilling your duty.

If someone who supports one party wants people to vote for that party, I can understand why they encourage people to vote for that party. It is strategically right for these advocates to motivate and convince those who already like that party but may not make the effort to make a vote, and appeal to those who do not have a preference yet. But a lot of times this is not the case. Some celebrities, public figures and politicians just ask you to vote no matter what. Plus, some people had to fight for the right to vote in the past. How could you not treasure that?

The problem is, if you are not informed, how should you decide who to vote for? Let us assume that person X wants a legislator who will do things that benefit X and the community. X has to choose between two candidates and X does not have much knowledge about the candidates nor political, social and economic issues. It is impossible for X to learn all that quickly. Should X just listen to some of the superficial claims of the candidates, like "the other party is destroying jobs!" or "the other candidate wants to take away our rights!" or should X just not vote? These are the only two options. Ideally, X should just not vote. It would actually be rather irresponsible to make a vote not based on a well-informed and thought-through decision. X should just leave it to those who are informed.

Of course in reality, many people vote based on how they feel about certain policies, not how they think about them. Also people may vote based on how candidates present themselves, not what they think the candidates will actually do for the society. Even when people know very well what the candidates have been really advocating for, they may still not be educated enough to make a good judgement about what is right and what is wrong. All these are not optimal.

I do think that people should have basic knowledge about the society, politics and economics (1), but that is a long-term aspiration. In the short-term, it is more optimal that people do not vote when they are uninformed.

But if you think you can make good judgement, you should vote. It is not about making your voice heard. It is about striving to make a collective decision that will make the society better. One vote sure does not make a difference. But the paradox is that, if everyone thinks that, no one would vote and the democracy would not function. It would be like everyone thinking their taxes do not matter and not paying taxes. That would stop the government from operating.

So, do not feel guilty if you do not vote. And if you have decided to vote, do not force other to vote.

(By the way, the mentality that voting is an act of patriotism is less common outside of the U.S.)


1. This is one of the reasons why I have this blog.

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