Philosophical Implications of Behavioural Economics (July 2014)

Behavioural Economics Implications for Philosophy

Summary

People are shown by experiments to often be irrational. Biases include:

  1. overconfidence,
  2. viewpoints differing depending on framing,
  3. anchoring on focal points,
  4. confirmation bias (we believe what confirms our beliefs),
  5. availability bias (recalled memories are more important),
  6. we don't adjust for winners’ curse,
  7. pain of losses loom larger than gains,
  8. herd behaviour,
  9. status quo preference,
  10. heuristics such as rules of thumb,
  11. emotions such as altruism, fairness, revenge.

What does this mean for raising kids, marriage, our sense of self, motivation at work, how we make decisions and public policy?

Some Literature

1979 Kahneman and Tversky proposed “Prospect Theory” http://en.wikipedia.org/wiki/Prospect_theory

Gary Becker took the opposite path by taking economics into psychology http://en.wikipedia.org/wiki/Gary_Becker

Thaler and Sunstein said people use instincts and rules of thumb which cause biased decisions so governments should intervene to alter their choice architecture. Nudge (2008) http://en.wikipedia.org/wiki/Nudge_(book)

Blink (2008) Gladwell said spontaneous decisions are better than well thought out ones http://en.wikipedia.org/wiki/Blink_(book)

Kahneman said Gladwell got it wrong. Spontaneous decisions are better only in specific circumstances (Thinking, Fast and Slow, 2011)

Questions

How does this compare and contrast with other authors we have considered?

  • Marx - is benevolent power okay?
  • Sandel - is a transaction important beyond an economic view?
  • Singer - normative versus positive views?
  • Romantic love - is it an "addiction" or positive and life-giving?

Parenting questions

Should you persuade your kids with $ incentives (e.g. $1,000 per ATAR point over 90), educate them (e.g. showing them degree options at different ATAR levels)

or vary their choice architecture (e.g. introducing them to doctors and lawyers who enjoy their work)?

How do you maintain the relationship while disciplining your child? Is the answer by foregoing traditional discipline and instead just framing their choices?

Gary Becker and conventional wisdom says the more investment in time parents make in their kids, the more successful adults they will be. But twin and adoption research finds this has almost no evidence. So should we:

  1. Invest our time teaching our kids (building their human capital)?
  2. Invest our time designing ways to better frame their choices?
  3. Relax and let heredity run its course?

Gary Becker said ("rotten kid theorem") that a selfish child who derives pleasure from hurting his sister can improve his behaviour by an altruistic parent withholding gifts of income until late in life. Or is it better to have the sister have control over giving him the money now?

Marriage and our sense of self

We are systematically overconfident. Most people over-praise our own virtues and rationalise away our faults. Is the answer that what we call our "self" needs to be checked against reality as self-perception is biased? Instead of when thinking about marriage asking is this person good enough for me, should we compare our own track record against what we expect from our spouse?

How do we deal with "irrational" people? Economists and other educated people use reason to debate with others, assuming they respond to logic. But are they essentially saying, "You are stupid, this is how to think”?

How We Work

Behavioural economics experiments show we are more motivated by our achievement than our pay. What does this mean for how we get the self-discipline to achieve our goals?

High stakes decision-making

Kahneman and Tversky say we should recognise our natural biases in decisions and adjust for them e.g. recognise we are overconfident and adjust by applying an overconfidence extra discount. Take more time analysing our big decisions. But those who do rather than think too much are often the ones who succeed. How should we make big decisions?

Public policy

Is it feasible to regulate irrational financial market behaviour (that brought about the GFC)? People act irrationally (creating bubbles and panics). But is it feasible to separate these irrational investors from speculators who help with price discovery?

A criticism of behavioural economics is that it can only explain isolated cases, so should we rely more on "blunt instrument" but hard-hitting economics to make policies? e.g. to encourage savings, do we raise interest rates or do we show pictures to people of homeless and their savings history? Are public policy "nudges” (e.g. placing fruit in canteens at eye level instead of taxing high calorie foods) enough to offset the bigger “shoves” of the vested interest in alcohol and food industries?

Do we regulate against framing? It is not false advertising but still exploitative. Well educated (using rational choices) are better off than less educated (who are affected more by framing biases).

Is it ethical to alter others' choice architecture to get what government want? Is "rational" right? Part of a free-society is letting people make bad choices, as long as his or her irrational economic behavior doesn’t pose costs to others. If choices like lack of saving reflect individuals’ preferences and values can we justify changing their behaviour by reframing?

Experiments show people become meaner as they feel they are richer (less compassionate, less empathic, ruder, more consumptive and use words asserting power). They also more attributed their wealth to their skill. So should we allow the capitalist system to increase inequality?

Voting

Ariely in "Predictably Irrational" says consumers are irrational so need government to regulate. But then how can the same irrational people vote for the best representatives? Can we reconcile this paradox?