Ye Olde rational economic man of the neo-classical economic model may well be on his last legs. He’s being faced with a new contender; the irrational human being. This star of the emerging field of behavioral economics does not make economic decisions based on careful calculations of personal gain.
The irrational human is heavily influenced by the way decisions are framed, being more likely to purchase something that is 97% fat free than something that contains 3% fat. This being is emotional, altruistic and their behavior is shaped by those around them. They prioritise the short term over the long term and place different value on different types of purchases even if the amount remains the same (three simple credit card payments of 19.99, anyone?). They spend more time agonising over the purchase of a mobile phone than they do choosing a superannuation fund.
It all sounds reasonable enough. Don’t we know all of this intuitively already? Consider the smoker, the soldier who volunteers for war, the carer, the parent who would sacrifice their life for their child, the consumer who amasses credit card debt that leads to their ruin, the gambling addict; life is full of examples of decisions made seemingly with no real calculation of self interest. Many other factors interplay in the process of making choices; emotional associations, group behaviour, perceptions of the self, mood, time and environment. The marketing industry has based their campaigns around irrational behaviour, group influence, framing, self perception and emotion for years.
Even neoclassical economists admit that humans aren’t always rational; it’s just that they consider irrational behaviours to be anomalies. Behavioural economics, a field grounded in psychology, instead posits that these ‘anomalies’ are central to human nature. Looking back on history at all the bizarre and irrational political decisions ever made with disastrous consequences (see The March of Folly by Barbara Tuchman) … or even just taking a look at NSW government policy making, I am inclined to say ‘yeah… and?’
True to the lofty authority of the academic world, this seemingly obvious insight may now play a critical role in the shift towards a sustainable society in two ways.
Firstly, behavioural economics presents policymakers with a new and potentially more effective set of tools to shape behaviour. Take climate change for example; this is a complex problem with distant and invisible consequences that are unevenly distributed. Because of this individuals and organisations are largely not modifying their behaviour, despite all that we know about how disastrous that course of action is. Viewed collectively, our entire society is acting against its own interest in survival. Solutions are needed that take this irrationality into account.
Robert Cialdini, a social psychologist at Arizona State University recently conducted a study in conjunction with the Sacramento Municipal Utility District. Thirty-five thousand electricity statements were sent to randomly selected homes in the district. Each statement rated consumers on their energy use by comparing it to that of their neighbours using smiley faces to indicate performance. Consumers would receive two smiley faces for great energy use, one smiley for good and frowns for below average.
After a six month period, Cialdini found that the customers who received the personalised statement reduced their energy use by two percent more than those who received the standard statements; the equivalent of taking 700 homes off the grid.
To explain further, here is an excerpt from a draft report on behavioural economics and climate change policy by John M Gowdy, Rittenhouse Teaching Professor of Humanities and Social Science (Department of Economics Rensselaer Polytechnic Institute)
“ ‘..Irrational’ patterns of behavior are central to human decision making and therefore, for economic policies to be effective these behaviors should be the starting point. This contention is supported by game theory experiments involving humans, closely related primates, and other animals with more limited cognitive ability…
The research surveyed in this paper suggests that the standard economic approach to climate change policy, with its almost exclusive emphasis on rational responses to monetary incentives, is seriously flawed. In fact, monetary incentives may actually be counter-productive. Humans are unique among animal species in their ability to cooperate across cultures, geographical space and generations. Tapping into this uniquely human attribute, and understanding how cooperation is enforced, holds the key to limiting the potentially calamitous effects of global climate change.”
The second way in which the emergence of behavioural economics can help us become sustainable is by giving us an opportunity to question a few of the economic foundations of our super sized culture. ‘Consumer choice’ has been one of the most sacred phrases of our era. Markets are expanded, malls built, new lines developed and wasteful products that serve no benefit to anyone introduced into society, all under the flag of increasing consumer choice.
But ‘consumer choice’ depends on everyone pretending that consumers are rational self maximisers for it’s dogmatic legitimacy. To admit that this isn’t so, we are opening up a whole can of worms. We are exposing the fact that we are far more open to manipulation than we care to admit. We may get the crazy idea that if we were thinking rationally we actually wouldn’t be working like dogs to buy ridiculous amounts of stuff we dont need; we’d be spending more time with our loved ones. We may have to question whether it is in fact a hallowed right of every rational citizen to purchase amazonian rainforest wood, when the net effect is detrimental for society. We may even question the truth behind the never before seen holy grail that is free market equilibrium. We may start to actually address this persistent niggling feeling that we’ve been sold a lemon.
Perhaps it does take an emerging academic field to tell us things that we secretly already know…