International Debate

The Marketplace of Perceptions: Behavioral economics explains why we procrastinate, buy, borrow, and grab chocolate on the spur of the moment

December 1, 2010 1203

This is an extract from a post originally published  in Harvard Magazine.

Like all revolutions in thought, this one began with anomalies, strange facts, odd observations that the prevailing wisdom could not explain. Casino gamblers, for instance, are willing to keep betting even while expecting to lose. People say they want to save for retirement, eat better, start exercising, quit smoking—and they mean it—but they do no such things. Victims who feel they’ve been treated poorly exact their revenge, though doing so hurts their own interests.

Such perverse facts are a direct affront to the standard model of the human actor—Economic Man—that classical and neoclassical economics have used as a foundation for decades, if not centuries. Economic Man makes logical, rational, self-interested decisions that weigh costs against benefits and maximize value and profit to himself. Economic Man is an intelligent, analytic, selfish creature who has perfect self-regulation in pursuit of his future goals and is unswayed by bodily states and feelings. And Economic Man is a marvelously convenient pawn for building academic theories. But Economic Man has one fatal flaw: he does not exist.

When we turn to actual human beings, we find, instead of robot-like logic, all manner of irrational, self-sabotaging, and even altruistic behavior. This is such a routine observation that it has been made for centuries; indeed, Adam Smith “saw psychology as a part of decision-making,” says assistant professor of business administration Nava Ashraf. “He saw a conflict between the passions and the impartial spectator.”

Nonetheless, neoclassical economics sidelined such psychological insights. As recently as 15 years ago, the sub-discipline called behavioral economics—the study of how real people actually make choices, which draws on insights from both psychology and economics—was a marginal, exotic endeavor. Today, behavioral economics is a young, robust, burgeoning sector in mainstream economics, and can claim a Nobel Prize, a critical mass of empirical research, and a history of upending the neoclassical theories that dominated the discipline for so long.

Although behavioral economists teach at Stanford, Berkeley, Chicago, Princeton, MIT, and elsewhere, the subfield’s greatest concentration of scholars is at Harvard. “Harvard’s approach to economics has traditionally been somewhat more worldly and empirical than that of other universities,” says President Lawrence H. Summers, who earned his own economics doctorate at Harvard and identifies himself as a behavioral economist. “And if you are worldly and empirical, you are drawn to behavioral approaches.”

Read the full post online here

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