Behavioral economics and economic man

How Behavioral Economics Rescue Economic Man From The Selfishness

Behavioral economics is one single most influential and dynamic area in the current economics. Applying some insights from psychological science(s) to the economic models so as to understand better the economics decision making, the behavioral look has provided new and important ways for the economists to understand why different people make different choices that they make. The purpose of this article therefore is to explain how behavioral economics rescue the economic man from the selfishness in which he finds himself.

Economic man is an imaginary perfect rational person who maximizes his/her economic welfare or being and achieves the consumer equilibrium by thinking marginally all the time. The importance of this concept is hinged in the theory of consumer behavior in which real people function such as this fictional entity (Wansink, 2006). On the other hand, economics is a group of ideas and conventions put together by different economists which they accept and use to reason along with. It is mainly a culture of doing things mainly by the economists. Behavioral economics therefore represents the transformation of such culture and it is a field of economics that study how decision-making process influences reached decisions in any organization as well as in any individual (Ainslie, 1992).

Neoclassical economics postulates an economic man in any system is the main course of being economic as well as the course of being rational. This economic man is assumed to have good knowledge is different aspects of his surrounding which is not clearly complete (Wansink, 2006). This man is assumed to posses a well organized and a stable system of personal preferences and better kills of calculation on the best action to take so as to make him attain the highest benefits as compared to other people.

The axioms of the consumer choices that underlie the economic man ensure that he, the economic man, is minimally rational and consistent in the choices that he makes because he always prefers more of a thing to less and he is able to efficiently allocate his low income among numerous things that he desires so as to enable him achieve a global utility maximum. In a standard welfare model, habits and culture are assumed to take a fixed position or at least change slowly during a given time period so that the cultural context of the Homo economicus/ economic man does not enter the analysis stage. The way tastes and preferences are formed is assumed to be outside the purview of economics because they are not matters of dispute (Stigler and Becker, 1977).

According to Veblen’s (1898), an Economic man is a homogeneous (Uniform) globule of desire full of self interest. Self-interest is defined by different economists as all things that are intangible and tangible to human beings (Solow, 1993) but in practice the real meaning of utility is radically narrowed down to mean the consumption of goods in the market. Any increase in the welfare is equated to the increase in the economic output. The Economists are aware of public goods, intransitivity, Veblen effects and interdependent utilities but all these real-world phenomena are very difficult to include in the general equilibrium framework that currently dominate the economic policy recommendations (Hirsch, 1976).

Different subjects explain the economic man in different terms pointing to the same meaning. For instance, biology explains the economic man as a selfish gene while regarding it as a concept that is used to explain the overall selfishness of any living thing especially man and for the direction of evolution. Richard Dawkins with his evolution theory coined this term in his book titled The Selfish Gene (Ainslie, 1992) as a notion of competition, struggle for survival/existence, natural selection and survival of the fittest in his idea of genes as self replicators. In a teleological account, evolution of the biological life is explained as being driven by these replicators, genes. The conclusion drawn here is that the successful replicators are very selfish that otherwise they would not replicate successfully. In order to protect and preserve their replication process, these genes create avenues of self-preservation in form of living things, their bodies and minds. From this type of reasoning, Dawkins (1976, p. 2) concludes that human nature cannot be anything but selfish as its very essence is composed of very selfish units in the name of genes. Later, Dawkins expanded his biological research by considering these genes as self-contained wholes things.

But, as Maynard Smith states in Barlow (1991, p. 195), this Selfish Gene does not contain any new facts but rather offers a new world view. The basic to this view is the notion that competition and the virtuousness of the selfish behavior of biological units are rife in ever being. It is from this view that the biologist Ghiselin (1974, p. 247) writes concerning the species and nature that natural economy is competitive from start to the end .This can be seen in the impulses which lead an animal to sacrifice herself for another turn out to have their rationale in gaining more advantage over a third animal especially where it is in her own interest. Therefore, every organism can reasonably be expected to aid her fellow organisms yet if given full chance to act in her own interest, nothing but speed will restrain her from brutalizing, from murdering, from maiming her mate or child (Andrei, 1999).

This perspective of the biological world replicates the economic perspective of human nature as being openly self-centered, rational in being consistent in choices they make and characterized by selfishness which is constrained by expediency (Frank, 1988). Strong intellectual thoughts in both economics and biology see the market economy as being full of utility-maximizing individuals without room for cooperation other than for a single individual to gain the immediate advantage over other individuals (Johnson, 2003).

With the above explanation, there are three areas that tend to look at the economic man in a bid to get him out of his selfishness. These areas include the neoclassical economics, the human behavior and the behavioral economics. The criticism of these three areas against each other really explains the demerits of the economic man and the associated selfishness to each other.

In the neoclassical economics, economics is the study of the way resources are allocated to their uses. In this school of thinking, economics is said to be the study which considers human behavior as a relation between alternative ends and scarce means. Virtually every neoclassical economist is a positive economist though there are a number of positive economists that are not neoclassical in nature (Harbaugh et al, 2002). Therefore, neoclassical economists consider the study of resource allocation as scientific and not a normative study. In addition, a neoclassical economist believes that free markets always bring about efficient resource allocation (Kagel & Roth, 1997).

With this understanding, neoclassical economists have made a number of assumptions. Depending on the definition that one can prefer, it can be said that economists are more interested in the resource allocation in nature and causes wealth of nations or perhaps something different. Irrespective of all these, all such things depend on the actions and decisions of people (Luce, 2000). Therefore, so as to get started, economists made or make some assumptions about people and about how individuals act and how they decide how to act. However, the economists have not as a rule based these assumptions on the psychological views of human minds. Rather, most of them have started from an assumption that few modern psychologists might support (Dahlquist & Kirkpatrick, 2007). This assumption is that human beings/ individuals are highly rational and self-interested/ selfish. Many neoclassical economists assume that human beings make their choices in a way that gives them the best possible advantage(s) especially given the circumstances that they face. Such circumstances includes such things as the prices of the resources, goods and services available, scarce income, limited and localized technology for transforming such resources into finished goods and services, taxes imposed on them by their organizations, regulations by their governments and other objective limitations on the choices that they make.

In Strict terms, neoclassical economics does not just assume that real and concrete people are rational and self-interested as it may seem. Rather, many economists assume that the economic systems work as if they consist of the rational and self-interested persons. People exists in all sorts ranging from sneaky and altruistic to smart and dumb but if the average is an individual that is rational and self-interested, then the system most definitely will act as if human beings in general were self-interested and rational (Hersh, 2002). The basis of neoclassical economics assumes that deviations from the rational self-interests are random and therefore will cancel out making the system to act as if every person is rational and self-interested. As a consequence, neoclassical economics studies the economic system that consists of rational, self-interested persons (Luce, 2000).

However, it is known that there are some examples of non-self-interested behavior of human beings who for instance give to the church and who sacrifice themselves in other ways — and common sense suggests that human beings are often irrational chumps.

There are two very issues here to closely scrutinize. The first one is that human beings are at times altruistic. One can not avoid concluding that people sometimes act on ethical values making it hard to see how the selfishness of this majority can cancel out this self-sacrifice of many others (Kagel & Roth, 1997). Therefore, people often act on non self interested values but whenever they do so they act on their own values and not of the government or some philosopher(s) or the economist that is observing (Dahlquist & Kirkpatrick, 2007). This might be called a rational individualism rather than a rational self interest.

What is left then is the rationality if human beings are not always self-interested. A broader neoclassical economics presumes that human beings choose things in a way that best advances their own values, altruistic or self-interested. The critics of the neoclassical economics sometimes argue that economics is an apology for self-interest.

We can therefore note the behavioral approach’s criticism to the neoclassical economics that man is always selfish and self centered. The behavioral approach indicates that not all people are self centered since many individuals act on behalf of other people (Harrison, 2005). This indicated that it is not true that all people are selfish. Rather, some are and it should not be generalized that all human beings are selfish to conform to the economic man.

However, human behavior is not always selfish and behavioral economics rescues economic man from the selfish gene. In other words, the behavioral economics criticizes the neoclassical economics whether people are always rational or not (Luce, 2000). The neoclassical economics is at times criticized for its normative bias against human beings especially on their assumption. In this perspective, it does not lay more focus on explaining the actual economies instead of describing a utopia in which Pareto optimality applies.

The assumption that human beings act rationally can be seen as ignoring very important aspects of the human behavior. Many people see the economic man to be very different from real people. Majority of the economists, even contemporary economists, have criticized the model of economic man. Neoclassical economics assumes people to be the lightning calculators of pleasures and pains, who oscillate like the homogeneous globule of desires of happiness under impulses of stimuli which shifts about an area but leaves then intact. Large organizations might come closer to the neoclassical ideal of maximizing profits but this is not necessarily seen as desirable whenever it arises at the expense of negligence of the wider social issues (Fehr & Gachter, 2000). The response to this argument is that neoclassical economics is more of a descriptive statement rather than a normative one. It therefore addresses such problems with the concepts of private against those of social utility.

Many critics of behavioral economics typically insist on the rationality of the economic agents. They contend that the experimentally observed behavior is not applicable to the market situations as the learning opportunities and competition ensures at a close approximation of the rational behavior. Equally, many others note that the cognitive theories like the prospect theory are models of decision making and not generalized economic behavior hence are only applicable to the sort of once-off decision problems that are presented to experiment the survey respondents.

Traditional economists are very skeptical of the survey based techniques which are put to use extensively in the behavioral economics. Economists typically emphasize on the revealed preferences over the stated preferences from the survey in determining the economic value (Fehr & Gachter, 2000). Experiments and surveys should be designed very carefully so as to avoid systemic biases and lack of incentive compatibility.

Some economists on the other hand dismiss these criticisms claiming that the results are reproduced in various situations and nations which can lead to good theoretical insight. Behavioral economists on the other hand have incorporated these criticisms by focusing more on the field studies as compared to the than lab experiments. Some economists therefore look at this split as the fundamental schism between the experimental economics and the behavioral economics. However, prominent experimental and behavioral economists overlap some techniques and approaches in giving answers to common questions.

In addition, many other proponents of the behavioral economics have taken note that neoclassical models many times fail to predict the outcomes in the real world context (Luce, 2000). Behavioral insights can therefore be used to update the neoclassical equations and the economists have noted that these revised models do not only reach similar correct predictions as the traditional models but predicts correctly some outcomes where the traditional models fail.

As an economic student, I object to the fact that man is always selfish. This drives to the numerous criticisms of the economic man. Criticisms of this notion that human beings are purely selfish go back to the start of the modern utility theory. Edgeworth (1881), for instance, in his theory of exchange included the term accounting for pure altruism. He stated that people might suppose that an object X with own utility is P tends, in a reflective and calm moment, to maximize his/her benefits from P to P+, where the + is a coefficient of effective sympathy. Equally, Mr. Veblen (1898) criticized the neoclassical concept of human beings as coldly calculating and coolly rational and this is still one most insightful literature among the criticisms of neoclassical theories (Ainslie, 1992). The other early, though neglected, criticism is that of Mr. Georgescu (1954) who stated that the individual utility not only depends on the individual well-being but also the community’s well-being to which the individuals belong. This truly indicates that human beings are not egocentric and self centered but also works for the benefit of the society in which such a person comes from.

Many other economists as well as just writers investigating the behavior of the human beings have come up with more criticisms while explaining the behavior of human beings. For instance, Frank (1988) and Hirsch (1976) all emphasized on the social nature of human beings and their decision-making process which is always associated with their behavior. It is true that that a big number of economic models have been developed to give explanation about altruism, charity, bequests and benevolence among human beings and how they exercise them. In doing all these, many economists together with many other social scientists have been quite ingenious in finding the explanations for the intentions for such behavior in self-interest among human beings. The possible selfish motivations or intentions that apparently lead to altruistic behavior include the enlightened self-interest, the pursuit of reputation among people, anticipation of reciprocity from other people and fear inherent in human beings that they will lose whatever little they have and as a consequence they will be faced with shame (Henrich, & Henrich, 2008). Further, different explanations indicate that personal utility can be derived from one person’s satisfaction or his contribution to it together with the benefits that adherence to the social contract may provide.

The motives of altruistic behavior among human being however can be studied in different categories. For instance, from a psychological point of view, two egoistic motives for altruistic behavior can be identified. The first category is based on the social learning and enforcement amongst people while the second category is based on arousal reduction (Fehr & Gachter, 2000). However, the theoretical and empirical investigation to the existence of altruism, different economists argue that altruism can also arise from people’s empathic emotions towards others. In some occasions an individual takes the perspective and position of another person that he/she perceives to be in need without feeling distress and helps to reduce his/her need. Given this explanation, one can conclude from numerous similar examples of altruistic behavior on which human behavior is based that moral commitments and economic factors shape each other and evolve and change within a given social environment and structures (Arnsperger & Varoufakis, 2005).

Having explained this, one can forget that neoclassical theories insist on the fact that human beings have the selfish gene dominant in its system. This is the one hat is responsible for the selfishness in the economic man. However, there are a number of criticisms of this argument mainly based on the behavioral economics exercise.

The selfish gene, just like the economic man, has also come under attack from numerous directions in general. The selfish gene together with its extension known as the extended phenotype has for a long time been criticized based on the fact that phenotype-distinction is not as clear as its proposers supposes. According to the explanations by the extended phenotype ideas, changes in the genes are reflected in the phenotypes and phenotypical effects determines the selection of genetic replicators (Henrich, & Henrich, 2008). Therefore, the phenotypical effects preserve or replicate themselves by means of their extended phenotypes. These phenotypical effects may be morphological or behavioral. For example, a phenotypic expression of the beaver genes is the dam it builds. However, the phenotypical transformations are not exclusively triggered or induced by the changes of the genetic replicators but can as well result from the changes in the elements of the environment (Rabin, Loewenstein, & Camerer 2003).

On a very close examination and scrutiny, the proponents of the selfish gene idea are not dogmatic enough as popularly believed by many people especially the economists. Some people argue that higher properties of life are emergent in virtually all situations. In addition, it is argued that the accepted explanations of causality from genes to culture just the same as from genes to any other products of life, are not heredity alone. Equally, they are not environmental alone. It is mainly the interaction between the two. Therefore, all possible expressions of phenotype are always encoded in genes though particular attributes which express themselves depends on the triggers from the surrounding environment (Dasgupta, 2002). These phenotypic expressions may as well depend on how an individual integrates within a group.

The controversy over the selfish gene is very important to the economists and economics in general because of its implication that competition is of much more complicated sort as compared to that which is assumed by the economic man (Fehr & Gachter, 2000). This competition is much more complicated as compared to the isolated people competing for the immediate gain. Likewise, cooperation is complicated as compared to a simple tit-for-tat strategy. Not only does the economic man’s model fail the test of realism but also fails to offer accurate predictions about the human behavior. Such failures are evident in the recent empirical findings by numerous economists.

In the standard theory, the economic man as described by neoclassical economics lead to micro-foundations approach to the economic policy. Macro economies are assumed to operate by the similar rules of constrained optimization which are used to describe individual organizations as well as households together with their people (Varoufakis & Hargreaves-Heap, 2004). Normally, a representative human being whose behavior is indicated and outlined by a well-behaved utility function and a representative organization outlined by a well-behaved production function are made use of to model some real-world phenomenon such as the global climate change or foreign trade. Without the assumptions of economic man and perfect competition such optimization models cannot reach a unique and stable equilibrium. Neoclassical models assume a strictly rational behavior in human consumption with constant returns in production and rely on the prices to dynamically adjust demand and supply.

In relation to behavioral economics, the existence of pure altruism and other forms of pro-social behaviors has much more implications to the economic policy. The first policy implication is that the impersonal markets are not and not anticipated to be the best vehicles for the expression of human preferences (Fehr & Gachter, 2000). Whenever economic decisions do not conform or tally with the axioms of consumer choices, market outcomes are not rational and therefore, there is no any reason to believe that a competitive equilibrium can represent social optimum. In as much as the market restricts choices to individuals then such choices exclude the richness of human behavior (Thaler, 1991). Equally, depending on who among people’s ancestors is considered human, people have been making decisions for many years based on personal interactions, direct negotiations and imposition of rewards and punishments so as to facilitate cooperation. It is however true that people have difficulties in making social decisions especially in impersonal markets (Frank, 1988). Even then, the prevailing trend is toward pushing more critical decisions into the market framework.

In conclusion, behavioral economics rescues the economic man from the notion that he is selfish. It is true that human being s are always pursuing their self interests and goals given their human nature, but it not true that they are totally engulfed in their selfishness (Wansink, 2006). The neoclassical economics theories explain well about the economic man and his interests but it should not be generalized that human beings are selfish beings ever in the world (Fehr, E. & Gachter, 2000). Human behaviors rescue man from the aforesaid selfishness because thee are many other human beings that sacrifice themselves to support other people in their society. This takes them out of the selfness that the neoclassical economics advocate. Human behavior is therefore not always selfish as is can be portrayed by the neoclassical economics (Harbaugh et al, 2002).

Many people have been influenced by religion and molded in a way that they value human life and fellow human beings to an extent that even if they are seeking self interests, they go out of their way to help others achieve they needs. For instance, doctors world over might have their intrinsic desire to posses a lot of money but they always help their patients to gain their health so as to continue working for their good. Equally, different countries can only prosper if every person or at least majority of the citizens works for the good of their nation rather than working for their own gain. Should such happen, that nation is doomed to be poor. Therefore, human behavior explained in behavioral economics plays a great role in rescuing the economic man from the selfish gene.

References

Ainslie, G. (1992). Picoeconomics, London: Cambridge University Press

Arnsperger, C., & Varoufakis Y. (2005). Most Peculiar Failure: How neoclassical economics turn theoretical failure into academic and political power. Erkenntnis, 59, 157-188.

Rabin, M., Loewenstein, G., Camerer, C. & (2003). Advances in the Behavioral Economics, New Jersey: Princeton University Press

Dasgupta, P. (2002). Modern Economics and its Critics: Models, Realism and Social Construction, London: Cambridge University Press

Faruk, G. (2008). The Behavioral economics and the game theory. The New Palgrave Dictionary of Economics, 2nd Edition

Fehr, E. & Gachter, S. (2000). Fairness and Retaliation: Economics of reciprocity. The Journal of the Economic Perspectives, 14, 159 p. 81.

Harbaugh, W., Krause, K. & Liday, G. (2002). Bargaining by children. Unpublished manuscript: University of Oregon

Varoufakis, Y. & Hargreaves-Heap, S. (2004). Game Theory: A critical text, London and New York: Routledge

Harrison, W. (2005). Advances in Behavioral Economics. Journal of Economic Psychology, 25, 793-795.

Henrich, S., & Henrich, J. (2008). The Culture and Evolutionary Origin of Cooperation: Kinship, Reciprocity and Ethnicity. London: Oxford University Press

Johnson, A. (2003). The Families of a forest: Matsigenka Indians of the Peruvian Amazon. California: University of California.

Kagel, H., & Roth, E., eds. (1997). The handbook of the experimental economics. New Jersey: Princeton U. P

Dahlquist, J., & Kirkpatrick, C. (2007). A Complete Resource for the Market Technicians. pp.49

Luce, R. (2000). The Utility of Losses and Gains: Measurement-theoretical and Experimental Approaches. New Jersey: Lawrence Publishers.

Hersh, S. (2002). Beyond Fear and Greed: Understanding the behavioral finance and the psychology of investing. London: Oxford University Press

Andrei, S. (1999). Inefficient Markets: Introduction to Behavioral Finance. London: Oxford University Press.

Smith, V. (2002). The Method in Experiment: A Rhetoric and Reality. Experimental Economics, 5, 91-110.

Varoufakis, Y. (1998). Foundations of Economics: A beginner’s companion, London and New York: Routledge publishers

Edgeworth, Y. (1881). Mathematical Psychics. London: L.S.E. Reprint 1934 publishers.

Frank, R. (1988). The Passions within Reasons: The Strategic Role of Emotions. New York: Norton Publishers

Hirsch, F. (1976). Social Limit to Growth. Cambridge: Harvard University Press

Thaler, H. (1991). Quasi Rational Economics. New York: Russell Sage Publishers Foundation.

Wansink, B. (2006). A process of Mindless Eating: Why people eat more than they think. New York: Bantam Books publishers