Saturday, January 6, 2018

On the roots of the behavioral economics.

Fact: people “don’t always make rational decisions in their best interests.
Question, “Why do they do that?” is explained in the book “Nudge: Improving Decisions about Health, Wealth and Happiness”, by Richard Thaler and Cass Sunstein.
The book is a strong source of very good insights, ideas and strategies. But it is rather large.
However, there is a shortcut helping to see the general idea behind the behavioral rules in economics.
This shortcut, though, has one limit; not everyone can use it, but only people with a special experience.
That special experience is called “parenting”, and those people are called “parents”!
Parents know very well how difficult it is to manipulate a child into doing something he or she does not want to do.
Parents know very well how often a child tries to do something which might do him or her some harm, even when the child “know” so, and how difficult is to make to agree the child to stop.
Child psychologists have developed many strategies for parents helping them to “trick” a child into making the right session (of course, from the parents’ point of view; but leaving the force to the last resource).
For example, such strategies include “bribing”, or “threatening to take away something valuable”.
BTW: most kids feel loss stronger than gain, even if the loss or gain would be the same, like the same toy. That happens because loosing something one has known for a long time is indeed not the same as getting a gift of something one sees the first time.
Hence, “the theory of loss aversion”. 
The book offers similar strategies, but modified for adults.
And the reason for those strategies to work is because many adults, even the smartest ones, often act like children.
 One can ask: “Why would smart adults act like children?”
The short answer is “Because no one can know everything.”
When people grow up and learn new things they get more and more professionally proficient in some of the areas of human practice. But even the smartest and the most knowledgeable person has his or her limits. When those limits are reached and a person needs to make a decision at the edge of his or her knowledge and experience, that person often starts acting in the same way he or she was acting when a similar situation happened with him or her the first time, i.e. in the far past, i.e. when the person was a child. In that state of mind a “nudge” which worked when the person was a child has a high probability to work again.
When that happens, telling the person “stop acting like a child and be an adult” is usually useless, or at least less helpful than finding the right “nudge”.
Hence, the behavioral economics.
Hence, the book (a good one!). 
Hence, political and economic “nudge” ideas. 
According to the “Nudge”: “people tend to be somewhat mindless, passive decision makers.” As a teacher who taught very many students how to make decisions (thousands of students; and not just via one-way lecturing, but having many face-to-face conversations) I agree with this assessment.
However, I would not use term “decision making” to describe a “passive mental state”, because “making” does not sound passive to me.
I would call people in such a state of mind “passive choice selectors”.
This, of course, is based on the answer to a question: “How do people make decisions?”
For example, when you (or your child, or your friend, or your enemy) stand in Baskin Robbins (or Dunkin Donuts, or Burger King) staring at the menu trying to figure out what to order this time – do you make a decision, or you just select one from several choices?
The answer to this question depends, in turn, on what do you call a “decision”.
Without dipping into a long discussion, let’s just say that in general, we – humans – make two types of decisions: rational decisions (a.k.a. logical, via a step­-by­-step reasoning; “true decisions”, or just “decisions”), and “irrational” (a.k.a. intuitive, a.k.a. a guess, or a hunch; which should be called differently). The ability to make rational decisions differs humans from other animals; take this ability away – and we will be no smarter than dolphins, or dogs, or monkeys, or cats.
During a usual day, we do not make too many of actual decisions (a.k.a. “rational decisions”, a.k.a. decisions), because usually we do not have to. Usually, we just have to select one from several choices which do not greatly affect our well­-being, or our future.
When we are angry, or when we are happy, or when we are sad, or when we are stressed, we may not select the same choice which we would have selected if we were calm and rational.
The reaction which we call a choice, (or many people call it a decision), is the result of the brain functions happening in our subconscious mind without our interference. Maybe, on average, we use about 10 % of our brain power for a logical reasoning. But that does not mean that other 90 % of the brain do nothing. Our brain is constantly analyzing on its own, without our awareness and interference, a huge amount of information to answer one single question: “What to do to survive?” (the strongest instinct of every healthy animal is self-preservation). Then our brain decides for us what choice for our immediate action should we select, makes as to act on that selection, and then places that selection into the logical part of itself, so we would be able to articulate it (first of all – to ourselves). And then we start defending this “decision we just made” like we were actual authors of it.
Of course, the picture I just painted is very simplistic, but presents a good initial model of a human “decision-making” process, which in reality is a “choice selection” process.
And one more note: the stronger our emotions are, or the longer we experience those emotions, the more chance is that we would not listen to any rationalization of our actions. We would tend to just react. There is a study which demonstrates that when people experience stress over a long period of time the brain chemistry changes (that is why doctors prescribe pills to help with depression). Disorientation is not just a psychological state, it is a state of a physical dis-junction in a brain.
When a person, who is on the edge of the knowledge, has to make a decision, it also causes some stress, and may cloud the decision-making process. The result is often slipping from making a decision to selecting a choice.
When the result of our choice selection might greatly affect our future, we tend to become even more stressful, and, hence, even less logical. This is one of the paradoxes of the decision-making process.
This is one of the reasons why people “don’t always make rational decisions in their best interests.

Appendix I:
My comment to an interesting paper on the matter

Economics is reaching the state physics has passed at least a century ago, i.e. making a transition from ideal models (pure math based on the assumption that people are robots who always know what is right, and always do what is right), to models which need to include errors and fluctuations. Good job!

Appendix II:
Some recent tweets on the difference between an adult behavior and a childish behavior.

(1) a kid = "I want to have this! Gimme that, gimme that!" (2) an adult = "I need to achieve this goal, and have to plan my actions" Transition from (1) to (2) is ONLY due to GOOD #Education #human #psychology explains #learning fix #LearningCrisis #think

Difference between (1) making a #mistake and (2) acting #idiotic: => 1. Acknowledge and #learn from it => 2. Insisting on being right even when was proved #wrong #human #psychology depends on #Education #thinking #STEM #Amazon can't do all #innovation

And one more on the meaning of being an “expert”

Every time when I hear/read "... missed/beat experts' estimates" - and that happens A LOT - I think "why call them "#experts"?" if they are CONSTANTLY #WRONG! Team uses darts to go against hedge-fund managers’ recommendations @WSJ #Business #MoneyTalks

Well. When I hear or read that "such and such company missed or beat experts' estimates" - and that happens A LOT - I always think: "This statement is wrong, it should say that experts again made a wrong prediction about company's data". Then I think: "Why do people call them experts if they are CONSTANTLY WRONG?". E.G. Steven Spielberg is an expert in directing and producing blockbusters - he is much more right on the money then the opposite. That what makes him an expert. What does make those so called "experts" be experts? What could help is a list of 3-5 year predictions of one expert and comparison with the actual data. But that's a big secret, I suppose. 
NB for "critical thinking advocates": this post represents an example of a critical thinking. Very briefly: 1. A commonly accepted statement. 2. A counter  statement. - most CT advocates would stop here and call it "critical thinking". But it is NOT. It is "critical", but not thinking. To make it thinking: 3. An example supporting the counter statement. 4. A proposition of a PROCEDURE which can assess the validity of the statement.

Thank you for visiting,
Dr. Valentin Voroshilov
Education Advancement Professionals

To learn more about my professional experience:
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