Behavioral economics

Richard Thaler, despite being a professor at prestigious universities, president of the American Economists Association, and recipient of the 2017 Nobel Prize in Economics, is still not well known among professional economists. One reason for this is that his research and contributions lie at the border between economics and psychology, a major co-founder of a new branch of economics: behavioral economics (Kahneman, another Nobel laureate, editor Thinking fast and slow2002).

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Economists chose the easy path of the neoclassicals, defining “economic man” as a kind of robot, able to process all available information and, based on the correct information, only make rational decisions thinking about the future. Despite the awareness that individuals do not live up to these ideals, it was assumed that an acceptable approximation of the aggregate would be achieved. However, new evidence from behavioral economics demonstrates that human actions systematically deviate from these ideals.

Thaler devoted himself to exposing the contradictions or deviations of this extreme rationality in the behavior of individuals, examining the differences between what people “should” do and what they “actually do” and the consequences of these contradictions in shaping. Economic principles. Hence Thaler's column 'Antagonisms', published in Journal of Economic Perspectives Between 1987 and 1990, documenting individual deviations from microeconomic development objectives.

By combining realistic psychological assumptions about how individuals with limited rationality, social preferences, and lack of self-control make decisions, it poses a major challenge to economic analysis. Thaler's proposals have met with opposition from some orthodox economists because they make the design of mathematical models difficult, moving us away from the ideal of following physics as a model (individual “particles”), with precise and stable laws, rather than deterministic laws. It can be introduced by human behavior, which is unpredictable and changeable.

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Key psychological factors to be explained: Why not purely rational behavior? What explains the difference in what individuals judge to be “fair” and “fair”? And how to explain “lack of self-control”?

Thaler posits how humans arrive at decision-making loaded with “behavioral biases.” We are subject to errors and do not always make rational decisions.

Thaler's findings in his interesting book Nudge (2008, updated 2021) have profound implications for the design of economic policies. His proposal is one of “independent paternalism,” which seeks to motivate economic agents to make better decisions without coercion. Thaler documents examples of how his approach affects all kinds of decisions, from tax collection to organ donation to pensions. For the latter, mandatory pension contributions applicable to all workers should be automatically designed, allowing individuals to clearly decide whether they wish to waive participation. This design is better than insisting that they accept deductions from their salaries today, often leading to very low contributions or opting out of pension plans, with the promise of a fair pension after three or four decades.

In Nudge ('nudge'), proposed decision frameworks that change individuals' behavior in a predictable manner, but without constraining preferences or changing economic incentives. In the second book (Misbehavior: Developing Behavioral Economics, 2016), Thaler posits that how humans arrive at decision-making loaded with “behavioral biases,” we are subject to errors and do not always make rational decisions. Examples include regret if any amount lost exceeds an equal amount gained; Placing too much value on a property or property because it is ours; Or a taxi driver who sets a target of a certain amount of daily profit, but stops working when he reaches his target on days of high demand, and works longer hours on bad days, behavior that goes against one's goal of maximizing profits. day Working hours ('Reasonable doubt', The Economist, October 14, 2017).

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The Swedish Academy of Sciences – which awards the Nobel Prizes on behalf of the central bank – mentions that Thaler developed: (1) the theory that there is “mental accounting” in which individuals create boxes with an emphasis on the narrow impact of each; The individual decision creates cognitive limitations that influence markets, rather than weighing the global effect; (2) In the “dictator's trial game” – their research demonstrates how the concept of “justice” enters into the decisions of economic agents, for example, leading firms to control price increases when demand is high, but not when costs are high. rise; (3) Lack of self-control (for example, whether or not to keep New Year's resolutions)—illustrated by his “doer” versus “planner” model—demonstrates how easily we fall to the temptations of immediacy and passivity. The preferences we have are not static over time.

In short, Thaler establishes a bridge between economics and psychology that better explains decisions made by economic agents, humanizes the former and incorporates experimental findings from the latter. Thaler celebrated his Nobel Prize by saying, “His most important contribution to economics was the recognition that economic agents are human beings, which must be incorporated into economic models,” emphasizing empirical aspects rather than theoretical speculation. The limits of individuals' rationality are the foundation of the new behavioral economics, and the tool of choice architecture is very powerful in influencing their decisions.

Fernando Montes Negrete

(Read all of Fernando Montes Negret's columns in EL TIEMPO here)

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