by Nathalie Jennifer RepenningSelling a mug – or not
“You are not in full control of your decisions. How you behave is not up to you but influenced by a lot of details. If one of them is changed you will change your behavior, too.” This provocative statement can be seen as the basis for a new branch of economic thinking: behavioral economics. Imagine you can sell a mug for 50 NT and think it’s a good price. But now imagine that you have owned it for five years and really love it. Would you sell it now for the same price? Probably not. You would probably want to be paid 70, 100, or even more. Or maybe you would not give it away at all? The problem you just encountered was introduced to the field of behavioral economics by Daniel Kahnemann, one of its pioneers. He and his colleagues found that the amount participants required as compensation once their ownership of something had been established (“willingness to accept”) was approximately twice as high as the amount they were willing to pay to acquire the same thing (“willingness to pay”). Behavioral economics aims to answer why people act as they do. What drives human behavior? How do humans make decisions and how can they be influenced? These are questions not only for academics but also for people in their daily lives. How can we best save money? Why do we always seem to fall in love with the wrong person? Traditional economic view – the origin of behavioral economics Common knowledge assumes that our behavior is driven either by the mind or the heart. Traditional economic theory has always tried to differentiate between the two. These models rely on the idea that humans are fully rational, consciously weighing their options and aiming for the best possible outcome. However, even when these assumptions were proven wrong, most economists dismissed them as anomalies. Behavioral economics – explaining human behavior further Kahnemann and his colleagues, however, began their careers as psychologists, and they used this training to reexamine apparent anomalies in economic behavior. In their findings, humans were no longer viewed as fully rational but highly influenced by social details such as how information was presented to them, the order in which they received the news, their past experiences, and a high loss aversion. The researchers found that phenomena such as mispricing and non-rational decision making could explain the occurrence of so-called financial bubbles and over/underreactions in the stock market. They also discovered that anecdotes and stereotypes, referring to past experiences and general cultural education and values, make up most people’s emotional filters. This is how individuals understand and respond to events in the world. Finally, they concluded that humans have never been overly thoughtful and analyzing. Rather, up to 95% of their decisions are based on mental shortcuts and rules of thumb, and they are profoundly influenced by how the information is presented. Anchoring effect as one famous root of irrationality In one well-known experiment, participants were asked to choose between two treatments for 600 people affected by a deadly disease. Treatment A was predicted to result in 400 deaths, whereas treatment B had a 33% chance that no one would die but a 66% chance that everyone would die. Because you don’t want 400 people to die you would choose B, right? Most participants in the experiment did the same. This same choice was then presented to them either with a positive framing, i.e. how many people would live, or with negative framing, i.e. how many people would die. Treatment A was chosen by 72% of the participants when it was presented with positive framing (“saves 200 lives”), dropping to only 22% when the same choice was presented with negative framing (“400 people will die”). So whereas treatment A contains exactly the same situation as treatment B, simply rearranging the words led people to alter their decisions. Neurofinance – searching for the origins of human behavior Along with behavioral economics is another new field: neurofinance. Here, scientists use common neurological techniques such as brain scans in order to understand humans’ seemingly irrational behavior. One major finding has been the deep entanglement of mind and emotions. When processing information, your brain will automatically include emotions in order to be able to assess the information’s value. This process is mostly unconscious, yet it is always there. Exposing the illusion The truth is that we never do anything without emotions. We are our emotions. They define how we perceive our surroundings, how we act and choose opportunities. They define the chances we take and the ones we do not, the people we interact with and the ones we don’t like. Indeed, the age-old distinctions between mind and heart, rationality and emotion have proven to be misconceptions. Rationality as well as irrationality is emotional. It has always been and will always be since the human brain works only with emotions. So what can we do? Can we even make proper decisions? Can we be rational at all? And if so, how? Emotions Vs. brain – brain and emotions In my view, we still can. Yet first we need to be aware that all our decisions will be influenced and conducted by our emotions. We need to accept and embrace this fact. There is nothing bad about emotions themselves. They can be good guidance, too. There is no point in acting highly rational if this makes you sad or angry all the time. Problems only arise when you forget your mind over your heart. But now, by knowing about common mistakes of human behavior and by being aware of the flaws of human decision making, when facing a difficult situation we may pause a bit and try to acquire a higher level of rationality: thinking twice and gathering more information before we make a final decision. a
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May 2024
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