Many scientific discoveries, when already made, seem obvious. So obvious that it's hard to imagine how scientists could be so stupid as to think otherwise. Perhaps the most perplexing area in economics is the area of how people make decisions - behavioral economics. I have been studying behavioral economics and deviation from rational behavior for the past seven years - it all started with a graduate project, and last year research in this area earned me a PhD in economics. When I tell interested friends that it was only in the twentieth century that economists began to say that a person, it turns out, is not always rational, and even does not use all possible information to make a choice, they begin to look with skepticism at the classic economists. Like, seriously,Mr. Adam Smith? Did you think that when I buy milk in Pyaterochka, I build a matrix of decisions, including prices for all retail stores in the city?
There are false porcini mushrooms, the amoeba has pseudopods, and this attitude towards economists I call the phenomenon of false-stupid classics. By the way, it is also due in part to cognitive biases, one of those studied in modern behavioral economics: hindsight bias. However, first of all, it is associated with that feature of the development of economic science, which distinguishes it from natural sciences like physics. About this feature of economic theory and how it happened that until the twentieth century one of its most solid foundations was the premise of a rational and selfish economic person, and why in the twentieth century they suddenly decided to revise it, I will tell you today.
1. How did the economic man appear
Scientific research can be compared to a game: first you need to agree on the rules and goals of the game, and then follow them as if you could not do otherwise. For example, you can actually walk safely from the chair to the door. But as part of the game, you will jump from chair to chair, from chair to sofa, and from sofa - elegantly to ottoman, because the floor is lava. It is the same with economic theory. Moreover, when it comes to analyzing behavior, most of the rules were invented by one person - Adam Smith.
Smith was a professor of logic at the University of Glasgow, and, according to his memoirs, he perfectly fit into the image of an absent-minded genius - he could go out for a walk in one dressing gown or talk to himself on a walk. In general, everything is clear with absent-mindedness. With genius too: in his famous work "Investigation of the Nature and Causes of the Wealth of Nations," Smith laid the foundations of modern economics. A logical question may arise - what, before Smith, there was no economic science? Yes and no. Before Smith, there were many different studies of economics - from macroeconomic works of the era of mercantilism, in which wealthy merchants (hence the name - mercato - in Italian for "merchant") studied the pros and cons of protectionism and the dilution of a gold coin with other metals, and to very microeconomic works scholastics who tried to understandwhether it is possible to give loans at interest or is it a terrible sin (which was a particularly delicate question given the fact that several popes of Rome were from the Medici family, the main bankers and usurers of Italy). However, while all of these works studied economics, they were not modern economics. They did not seek to discover any regularities that governed economic life, its general laws, but rather tried to understand how to make the economy behave as the sovereign would like, or how it fits into a certain ethical system, etc. Using the example of physics, we can say that all this was not physics, but engineering work. Adam Smith was one of the first who tried to create precisely the science of economics, and this was not an easy task.that several popes were from the Medici family, the main bankers and usurers of Italy). However, while all of these works studied economics, they were not modern economics. They did not seek to discover any regularities that governed economic life, its general laws, but rather tried to understand how to make the economy behave as the sovereign would like, or how it fits into a certain ethical system, etc. Using the example of physics, we can say that all this was not physics, but engineering work. Adam Smith was one of the first who tried to create precisely the science of economics, and this was not an easy task.that several popes were from the Medici family, the main bankers and usurers of Italy). However, while all of these works studied economics, they were not modern economics. They did not seek to discover any regularities that governed economic life, its general laws, but rather tried to understand how to make the economy behave as the sovereign would like, or how it fits into a certain ethical system, etc. Using the example of physics, we can say that all this was not physics, but engineering work. Adam Smith was one of the first who tried to create precisely the science of economics, and this was not an easy task.They did not seek to discover any regularities that governed economic life, its general laws, but rather tried to understand how to make the economy behave as the sovereign would like, or how it fits into a certain ethical system, etc. Using the example of physics, we can say that all this was not physics, but engineering work. Adam Smith was one of the first who tried to create precisely the science of economics, and this was not an easy task.They did not seek to discover any regularities that governed economic life, its general laws, but rather tried to understand how to make the economy behave as the sovereign would like, or how it fits into a certain ethical system, etc. Using the example of physics, we can say that all this was not physics, but engineering work. Adam Smith was one of the first who tried to create precisely the science of economics, and this was not an easy task.Adam Smith was one of the first who tried to create precisely the science of economics, and this was not an easy task.Adam Smith was one of the first who tried to create precisely the science of economics, and this was not an easy task.
Imagine that they put you in front of Niagara, gave you a brush and an easel, and said - paint. And you can't draw at all. Moreover, the waterfall is a complicated thing - it moves, the light changes all the time, the sun shines on the spray, birds fly there, tourists roam. How to draw it? Usually, art schools advise you to start with a simple sketch in which you try to convey the scale and basic forms. Not details, but something like "stick-stick-cucumber". In the end, even a sketch of a statue of David began with a combination of different sized ovals, triangles and other simple shapes. As you may have guessed, in our example you are Adam Smith, and Niagara is economic life in all its complexity and fullness. There is a blacksmith and a soap-maker who exchange an awl for soap, and a factory that needs to understand how to optimize production, and a king,who wishes prosperity to his state. And so great was Smith's genius that in Wealth of Nations he was able to sketch every level of economic life — the micro level at which individuals made economic decisions, and the level of firms, and the macro level of government. However, since economics is a really complex thing, almost like Niagara Falls, Smith needed to depict it in his first-in-the-history-of-economic-science sketch schematically, choose the most important thing, maintain proportions and general forms, grasp the very essence of movement and not waste little things. Simply put, he had to single-handedly come up with the rules of the game that economists had been playing for a hundred and fifty years, until the twentieth century, when they finally felt confident enough to start bringing this schematic game closer to reality.
This is one of the main features of economics. In physics, you make a lot of observations - you throw, for example, pebbles from a tower on the heads of passers-by - and you notice a pattern: pebbles fall and passers-by swear. Then you notice the ebb and flow, and that the Earth revolves around the Sun, and you yourself do not fall from this Earth into cold space, and you notice a certain pattern here. Then you apply this pattern to other phenomena, and if you notice that something does not converge, you can either discover something new (so Adams and Le Verrier noticed that Uranus somehow rotates incorrectly, and as a result, scientists found Neptune), or reconsider this pattern, as happened with Thomson's model of the atom of the "cake and raisin" type (physicists no longer think that an atom is like a cake).However, neither inductive (when you collect a lot of observations and draw conclusions based on them), nor experimental methods were widely used in economic theory at the dawn of its appearance for a number of reasons, of which here I will give only 2 main ones.
First, it is very difficult to conduct an experiment in economics, because the conditions and subjects of the experiment are changing all the time, and only recently has an experimental economy appeared, in which, mainly, students are experimented with using various amusing tests (by the way, disputes about the value of the conclusions obtained from these experiments, as well as about the quality and representativeness of the data collected in this way are still running, and with the reproducibility of these experiments, everything is not so unambiguous yet).
Second, economists also had problems with the inductive approach. To begin with, it was economists, in particular John Stuart Mill, who were among the scientists who drew attention to the key problem of induction, known widely under the code name "black swan". The problem is that after seeing 100, 1,000 or 1,000,000 white swans, we cannot say that all swans are white. We can only say that we have seen so many white swans. True, in the 19th century, Mill used a not so cute example and instead of white fluffy birds he spoke of death: they say, yes, before all people died, but this does not mean that everyone will continue to be; what if it was a local occurrence? And some man like the Duke of Wellington will take it and not die. After such an argument, they did not particularly want to get involved with induction and were looking for general laws,which could be verified by observation. This, by the way, was also convenient, because people are not as representative of each other as the balls that Galileo threw from the Leaning Tower of Pisa, and for inductive inferences it would be necessary to collect a lot of observations. To analyze such a volume of data, new mathematical tools would be needed, which appeared only almost one and a half hundred years after Smith.
In general, economics initially did not work out with the methods of the natural sciences, and instead, scientific abstraction and introspection (that is, self-observation) became popular, and one of the important means by which the theory was created were metaphors and models. It sounds a bit confusing, so I'll explain what I mean with the economic person model.
When Adam Smith proposed a description of human behavior in The Wealth of Nations, he did not use extensive polls, statistical methods, and mathematical modeling of decision-making. Rather, he used common sense and a pinch of dreams about how people would behave in an ideal world. As a result, since Smith was a great clever and had a lot of common sense, he got a model that, although it was still a spherical horse in a vacuum, turned out to be a very effective and convenient horse for economists. The model was built on 4 main premises: people are rational, selfish, have complete information (and can analyze it) and honestly fulfill their obligations. Of course, since Smith was not a fool, he understood perfectly well that people actually do not behave like that, this is only a model, a metaphor, if you like,ideal person. In the 19th century, at the suggestion of another economist and philosopher, already familiar to us Mill, the model began to be called "homo economicus", i.e. economic man. Until the middle of the twentieth century and the emergence of behavioral economics, this model existed with minor changes that did not affect its hard core, i.e. the central idea that people are rational egoists. Selfishness, by the way, in this case does not have a negative connotation, it is not a lack of character, but a certain common feature of a person. Something like: people do not have feathers, and they are selfish, this is not bad or good. In the 19th century, it was the rational egoism of man that formed the basis of such a direction of economic theory as marginalism.Until the middle of the twentieth century and the emergence of behavioral economics, this model existed with minor changes that did not affect its hard core, i.e. the central idea that people are rational egoists. Selfishness, by the way, in this case does not have a negative connotation, it is not a lack of character, but a certain common feature of a person. Something like: people do not have feathers, and they are selfish, this is not bad or good. In the 19th century, it was the rational egoism of man that formed the basis of such a direction of economic theory as marginalism.Until the middle of the twentieth century and the emergence of behavioral economics, this model existed with minor changes that did not affect its hard core, i.e. the central idea that people are rational egoists. Selfishness, by the way, in this case does not have a negative connotation, it is not a lack of character, but a certain common feature of a person. Something like: people do not have feathers, and they are selfish, this is not bad or good. In the 19th century, it was the rational egoism of man that formed the basis of such a direction of economic theory as marginalism.but some common feature of man. Something like: people do not have feathers, and they are selfish, this is not bad or good. In the 19th century, it was the rational egoism of man that formed the basis of such a direction of economic theory as marginalism.but a certain common feature of a person. Something like: people do not have feathers, and they are selfish, this is not bad or good. In the 19th century, it was the rational egoism of man that formed the basis of such a direction of economic theory as marginalism.
When economists got a little more comfortable with the homo economicus model and began to feel more confident, they adjusted two of the most implausible premises: completeness and honesty. Smith, being himself a Scottish gentleman, assumed that other people, once taking on obligations, fulfill them fully and on time. In the twentieth century, Ronald Coase dismissed the premise of gentlemanly behavior of economic agents as untenable, creating a theory of transaction costs (and received the Nobel Prize for this - as you can see, economists are very happy with even a small refinement of their model). Transaction costs are transaction costs incurred before, during and after the conclusion of the contract. For example, if you decide to buy an apartment in a building under construction, the transaction costs ex ante (before) will include a voyage through the districts,where do you look after real estate, the time you spend on developers' sites, etc. Ex post costs will include periodic visits to the pit and, if you're unlucky enough, attorney fees to shake out your money in the event of a breach of due date.
Following Coase, George Akerlof, Joseph Stiglitz and Michael Spence challenged the idea of completeness of information and proposed the concept of "asymmetric information" - a situation where the seller and the buyer have different amounts of information about a product and this can be used by the seller to generate additional profit. They did a research on what I think was perfect - you can't imagine better - in the used car market, describing the economic rationale behind when a salesman convinces you to buy his almost new "swallow", which was brewed from three well-worn pigeons.
2. Why was the economic man so popular?
Although the honesty and completeness of the information were adjusted and brought closer to reality, the premise of rational selfishness was stronger than before, and this was due to several reasons.
First, it has been successfully used by marginalists to create a theory of value based on marginal utility. It all started with the philosopher Jeremy Bentham, who suggested that a person strives in this life for two things: to get pleasure and avoid suffering. This hedonistic concept was taken up by economists, who at that time were already pretty tired of the hegemony of the labor theory of value, which believed that the value of a product was determined exclusively by the cost of its production, and completely forgot about the consumer. In 1871, a marginalist revolution took place on both sides of the English Channel - Jevons in Great Britain and Menger in Austria-Hungary suggested that the value of a good was based on its ability to satisfy human needs, which they called "utility." They explored marginal utility,that is, the utility of the last consumed unit of goods, from which, by the way, the name marginalism came from - “marginal”, marginal. In the work of the marginalists, man was presented as a pleasure machine, and the theory of utility maximization was developed, according to which people chose the strategies of behavior that allowed them to derive the most pleasure. Hence, by the way, one of the most common definitions of economics: the science of how people try to satisfy their unlimited needs in conditions of limited resources. Marginalists did not try to bring the spherical horse in a vacuum closer to reality, they polished it to a shine and, if it began to deflate a little under the attacks of Marxists and the German historical school, pumped it back to the state of an ideal sphere.from here, by the way, came the name marginalism - “marginal”, marginal. In the work of the marginalists, man was presented as a pleasure machine, and the theory of utility maximization was developed, according to which people chose the strategies of behavior that allowed them to derive the most pleasure. Hence, by the way, one of the most common definitions of economics: the science of how people try to satisfy their unlimited needs in conditions of limited resources. Marginalists did not try to bring the spherical horse closer to reality in a vacuum, they polished it to a shine and, if it began to deflate a little under the attacks of Marxists and the German historical school, pumped it back to the state of an ideal sphere.from here, by the way, came the name marginalism - “marginal”, marginal. In the work of the marginalists, man was presented as a pleasure machine, and the theory of utility maximization was developed, according to which people chose the strategies of behavior that allowed them to derive the most pleasure. Hence, by the way, one of the most common definitions of economics: the science of how people try to satisfy their unlimited needs in conditions of limited resources. Marginalists did not try to bring the spherical horse closer to reality in a vacuum, they polished it to a shine and, if it began to deflate a little under the attacks of Marxists and the German historical school, pumped it back to the state of an ideal sphere.In the work of the marginalists, man was presented as a pleasure machine, and the theory of utility maximization was developed, according to which people chose the strategies of behavior that allowed them to derive the most pleasure. Hence, by the way, one of the most common definitions of economics: the science of how people try to satisfy their unlimited needs in conditions of limited resources. Marginalists did not try to bring the spherical horse in a vacuum closer to reality, they polished it to a shine and, if it began to deflate a little under the attacks of Marxists and the German historical school, pumped it back to the state of an ideal sphere.In the work of the marginalists, man was presented as a pleasure machine, and the theory of utility maximization was developed, according to which people chose the strategies of behavior that allowed them to derive the most pleasure. Hence, by the way, one of the most common definitions of economics: the science of how people try to satisfy their unlimited needs in conditions of limited resources. Marginalists did not try to bring the spherical horse closer to reality in a vacuum, they polished it to a shine and, if it began to deflate a little under the attacks of Marxists and the German historical school, pumped it back to the state of an ideal sphere.which allowed them to get the most pleasure. Hence, by the way, one of the most common definitions of economics: the science of how people try to satisfy their unlimited needs in conditions of limited resources. Marginalists did not try to bring the spherical horse in a vacuum closer to reality, they polished it to a shine and, if it began to deflate a little under the attacks of Marxists and the German historical school, pumped it back to the state of an ideal sphere.which allowed them to get the most pleasure. Hence, by the way, one of the most common definitions of economics: the science of how people try to satisfy their unlimited needs in conditions of limited resources. Marginalists did not try to bring the spherical horse in a vacuum closer to reality, they polished it to a shine and, if it began to deflate a little under the attacks of Marxists and the German historical school, pumped it back to the state of an ideal sphere.even if he began to deflate a little under the attacks of the Marxists and the German historical school, they pumped him back to the state of the ideal sphere.even if he began to deflate a little under the attacks of the Marxists and the German historical school, they pumped him back to the state of the ideal sphere.
In 1890, Alfred Marshall published The Principles of Economics, in which he resolved a dispute between marginalists and adherents of the labor theory of value. Marshall produced the famous "neoclassical synthesis" by saying that value is determined by both marginal utility and marginal cost of production. Both approaches are right, the question is closed, we disagree. Marginalism was incorporated into neoclassicism, and the premise of utility maximization successfully migrated to modern economic theory without any significant changes.
The second reason for the survivability of the economic man model was mathematics. As anyone who has had a fascinating conversation with taxi drivers knows, economics, like medicine, is an area in which a huge number of people consider themselves experts. In order not to erect an impenetrable wall, then at least to create some kind of protective fortifications, in the 19th century, economists began to increasingly use mathematics to describe their models. Of course, they still used it for all sorts of important reasons, for example, to somehow systematize their logical calculations and analyze data and indicators, but the desire to make young science a little more "scientific" and serious, too, I think, played a role. At first, mathematics was sometimes included somewhat awkwardly, for example, with the help of formulas,what was shorter and easier to say in words, or the conclusions obtained as a result of the calculations did not make any sense - a kind of "one and a half digger". One of the most successful fans of mathematics was, by the way, another marginalist, Leon Walras, the creator of the idea of "neoclassical time", according to which if you know everything about the past and have the right mathematical tools, you can accurately predict the future. And it quickly became clear that the model of the economic man approached the mathematics used by economists of that time better than more realistic, and, therefore, more cumbersome assumptions. In the beginning there was a time of differential equations in economics and smooth continuous functions, which mainly described the behavior of large groups of people, and then, with the advent of game theory, the concept of utility maximization fell perfectly into simple games.describing the behavior of players seeking maximum payments. The popularity of the model and the similarity of economic people helped - since they are all intelligent egoists, one can consider their unique tastes, preferences and beliefs as collateral noises that do not have a great influence on behavior, and consider participants in economic life as a kind of "material points" whose shape and size can neglected.
Despite all of the above, a model with such implausible assumptions would not have lasted even a couple of decades if it did not give good results. And she gave. In the twentieth century, even neoclassical economists stopped talking about how people actually behave according to the Smith model. Instead, they noted that economics is a probabilistic science ruled by the law of large numbers and laws-trends. Neoclassicists seem to say: okay, a person is really very complex, and we cannot predict the behavior of a particular individual with all his tastes, preferences and stupidity. But we can say how an average, generalized person behaves, and how large masses of people behave, other things being equal. Such predictions have value for public policy and for the design of macroeconomic programs, and in the end it is better.than nothing. A kind of apotheosis of this stage of resignation to the limitations of the model of economic man was the following idea of neoclassicism: yes, people are not rational, but they behave,as if they were rational, then even on the basis of the wrong premise, we can come to the right conclusions. Indeed, economists were able to make predictions with good accuracy (especially for the short term) and model the behavior of large groups. This was largely due to the fact that individual deviations from the rationality of different people smoothed out each other. Imagine a puzzle - each of its pieces is not rectangular, but the bulges and bulges of different parts cancel each other out and the result is a rectangular picture - as if the pieces had even rectangular edges.
I would venture to suggest that even this would not have been enough for the vitality of the model of the economic man, if not for one more factor: the premise of human rationality was simply pleasant. It is flattering to think that a person is rational in principle, and that unreasonable behavior is rather a deviation from the norm that does not have great consequences for society. This factor sounds unscientific, but it also played a role. When Adam Smith was developing his model, the belief in the limitless possibilities of the human mind was in vogue, which later, in the 19th century, passed from the pages of the philosophical treatises of Descartes and Hume to the world of fiction. Writers like Jules Verne painted a world in which almost nothing was impossible for a man who had properly sharpened and trained his mind. A specific person could be limited in their abilities,but a man in principle - a spherical man in a vacuum - could reach unseen lands and achieve incredible discoveries thanks to his mind. Although economics, especially neoclassicism of the twentieth century, strived to be a positive science, i.e. to describe the world as it is, it always retained a normative aspect that spoke about what the world should have been. People were not rational, and economists knew this, but they wanted people to be rational.but they wanted people to be rational.but they wanted people to be rational.
The economy's attraction to natural sciences also played a role. Of all the social sciences, economics has always more than any other strived to prove that it investigates the laws of behavior of people and firms with the same exact and positive approach that the natural sciences investigate the laws of nature. At the time of Adam Smith, physics was the queen of the natural sciences, and economists actively used metaphors and comparisons from it in their works: firms-material points in a world of perfect competition, uniform straight forward movement of the economy, striving for a state of equilibrium, etc. biology and the theory of evolution captured the minds of people, and economists also did not stand aside. Marginalists have compared the law of diminishing marginal utility with the Weber-Fechner law,according to which the reaction of the receptor to the stimulus weakens upon repeated contact with the stimulus, and rational egoism has turned from a consciously chosen strategy of behavior into an evolutionarily grounded, a kind of "instinct". Thanks to Spencer and Darwin, everyone was talking about the survival of the fittest, and in economics this was extended to behavior strategies. The logic was something like this: the most adaptable, "effective" strategies survive, which means that ineffective, non-maximizing strategies simply wither away. Thorstein Veblen, the founder of institutional economics, even applied this logic to the analysis of institutions (that is, customs and practices) in general: effective institutions survive, ineffective ones remain in the past and are forgotten. Okay, but what does rational selfishness have to do with it, you ask? The idea was that peoplewho did not maximize their utility, that is, they were not rational egoists, they simply pushed more efficient brethren to the outskirts of the evolutionary race, so in the end only hedonists and maximizers remained, and even a few strange deviations that did not affect the statistics. Behaving rationally and selfishly was reasonable from the point of view of survival both for the individual and for the entire community - according to the concept of the invisible hand of the market, which brought together individual selfish aspirations for the good of the whole society.To behave rationally and selfishly was reasonable from the point of view of survival both for the individual and for the entire community - according to the concept of the invisible hand of the market, which brought together individual selfish aspirations for the good of the whole society.Behaving rationally and selfishly was reasonable from the point of view of survival both for the individual and for the entire community - according to the concept of the invisible hand of the market, which brought together individual selfish aspirations for the good of the whole society.
Meanwhile, despite all the listed advantages of the homo economicus model, dissatisfaction with its sphericity and horseness gradually accumulated, and in the first half of the twentieth century, experts from neighboring areas began to look with curiosity at the economy, wondering if they could help in something. For example, psychologist George Katona suggested that there are two types of economic behavior: rational and habitual, and a person makes a decision only in the first case.
• Rational behavior, which is the subject of interest of economic theory, is more common in difficult, atypical situations or in cases where this decision is associated with high costs, has significant consequences, etc.
• Habitual behavior is more typical for typical, repetitive practices.
For example, buying a house is an important decision, and at least in an ideal world, a person before such a purchase will try to behave as close as possible to the economic person Adam Smith: he will analyze the market, collect information and build, as he can, a matrix of decisions (or even would be a plate with calculations of different mortgage options). If you are going to buy kefir, you just buy the same one that you took before - simply because it was normal, or you take to try a new one in a beautiful box, and even if it is nasty and you have to throw it away, there is little loss.
Catona's theory reconciled economic spherical horses with reality and was not very different from what modern behavioral economics and cognitive science tell us about decision making.
Spoiler alert: now we believe that there are two types of thinking, two systems: System-1, which suggests answers quickly, but not always correctly, and System-2, which thinks slowly and thoroughly, but helps us with complex atypical tasks.
When you bought something in one click, and immediately after wondered if you really need sneakers in the shape of unicorns, System-1 grabbed something at a discount without thinking, but quickly. And when you write a complex piece of code or help a child with an Olympiad problem in physics, then System-2 comes into play. The question may arise, why do we need System-1, but the fact is that System-2 eats up all the RAM and is very, very slow, so in most situations in life we simply do not need it, and sometimes it is harmful. For example, a primitive man who went to the bushes on important matters, and, hearing a suspicious rustle, began to analyze all possible reasons with the help of System-2, was safely eaten by a tiger. And his primitive colleague, who did not delve into the details, but at the level of System-1 immediately gave a streak, perhapsa couple of times in my life I ran from completely harmless bushes, but in the case when a tiger was still sitting in the bush, I was able to make my legs in time. But this is already a conversation for another longread.
So, by the middle of the twentieth century, more and more criticism of the economic person began to sound, to which even moral and ethical argumentation was added (for example, anthropologists like Marcel Moss began to talk about the fact that rational egoism is not characteristic of all people, but only cold-blooded ruthless capitalists and toothy market exchange; and that there are other societies and other ways of organizing economic life, built not on selfishness and maximizing utility, but on mutual assistance). Neoclassical economists at the same time persistently continued to bend their line, and their position was significantly strengthened by the development of mathematical methods, game theory and econometrics. The situation changed in the second half of the twentieth century, when computer science and computer science in general became the trendsetter and the main source of metaphors. If in XIX,during the domination of biology, the whole society was likened to one huge organism, but now the brain of one person has begun to be compared to a computer. And it was at this point (and largely because of such comparisons) that behavioral economics was born.
3.
The founding father of behavioral economics was Herbert Simon, a Nobel laureate with a passion for two areas of study: economics and artificial intelligence. Simon drew attention to the fact that in the world of computer science, algorithms did not have to revise really all possible solutions based on really all possible data - there was simply no capacity for such an enumeration. Instead, everyone was satisfied if the algorithm produced a good enough result. The cost-benefit ratio is one of the key not only in economics, but also in computer science, and in their completely different areas:
• In cryptography, your code should not be unbreakable, in principle, it is considered good if it is more expensive to crack than information that it is encrypted.
• In data retrieval automation, you don't really need to find all the options - you need to find enough good options.
• A Harvard professor will give you better literature on his subject than Google, but Google will give you reasonably good results given how much cheaper it is to Google than hiring a Harvard professor to help anyone.
Simon transferred this logic from algorithms to humans - by the way, it turned out to be a transition from biological metaphors to computer metaphors - and suggested that people also do not seek the maximum, best solutions. The search for a strategy of behavior that would bring really maximum utility is, firstly, very expensive, and, secondly, it is not always possible (rather, it is almost never possible). Simon was the first in economics to suggest that human cognitive capabilities are in principle limited. We cannot process all the information, not only because of the asymmetry of information, i.e. not because we do not have it, but also because even if we did have it, our cognitive abilities, our computing power simply did not have enough. Moreover, in cases where we could make such complex reflections, they would eat up so much time and effort,that it would still be ineffective. So Simon in his theory of bounded rationality divided two concepts: effective behavior and maximizing. Before him, it was believed that maximizing behavior = effective, the most effective strategy - this is the strategy that gives the best results. Simon instead of maximum (best) results proposed the concept of "satisfactory results". Satisfactory results are results that do not give maximum satisfaction, but sufficient satisfaction. In the milk example from the beginning of this longread, the maximum result is milk that meets your need better than any other option in town. It stands at the intersection of many: the most delicious, the most useful and the cheapest. Simon's theory said: Oh, come on,no one actually spends a lot of time looking for the best milk. Everyone takes what is normal. Moreover, when you need to make a major important purchase - like an apartment - people also don't look for the really best one, but just take a good enough one. This is due 1) to the cognitive limitations of people, 2) to the fact that the difference in pleasure between the best and most satisfactory result is less than the difference in the cost of finding a satisfactory and best result.that the difference in pleasure between the best and most satisfactory result is less than the difference in the cost of finding a satisfactory and best result.that the difference in pleasure between the best and most satisfactory result is less than the difference in the cost of finding a satisfactory and best result.
This innovation alone has revolutionized the world of decision-making economics. People are not rational, and that's okay. Shock content, you can compare this with the emergence of quantum electrodynamics, when it suddenly turned out that the behavior of quantum particles can only be described probabilistically. The colossal taboo was lifted, and suddenly it became normal to talk about the irrationality of people. However, Simon did not stop there and formalized another idea, which scientists sometimes talked about in passing, but never before so openly declared. Simon was the first to declare that economic theory is not concerned with assessing the rationality of people's goals, it is only interested in the rationality of achieving these goals. He called this concept procedural rationality. Half a century before him, Vilfredo Pareto argued in a similar vein,one of the founders of sociology - however, unlike Simon, he did not dwell on this in detail and did not come up with a beautiful name. But he gave a good example: the ancient Greeks, said Pareto, before going out to sea, made sacrifices. Now we know that there is no relationship between a killed lamb and good weather, so this behavior seems irrational to us. But for the ancient Greeks, it was completely rational, since they believed that this connection was. It would be irrational just not to make the sacrifice, jeopardizing the entire journey. This is the key idea of Simon's procedural rationality: goals that people strive for are accepted as the rules of the game by default, and economic theory explores how, playing by these rules, can win.unlike Simon, he did not dwell on this in detail and did not come up with a beautiful name. But he gave a good example: the ancient Greeks, said Pareto, before going out to sea, made sacrifices. Now we know that there is no relationship between a killed lamb and good weather, so this behavior seems irrational to us. But for the ancient Greeks, it was completely rational, since they believed that this connection was. It would be irrational just not to make the sacrifice, jeopardizing the entire journey. This is the key idea of Simon's procedural rationality: goals that people strive for are accepted as the rules of the game by default, and economic theory explores how, playing by these rules, can win.unlike Simon, he did not dwell on this in detail and did not come up with a beautiful name. But he gave a good example: the ancient Greeks, said Pareto, before going out to sea, made sacrifices. Now we know that there is no relationship between a killed lamb and good weather, so this behavior seems irrational to us. But for the ancient Greeks, it was completely rational, since they believed that this connection was. It would be irrational just not to make the sacrifice, jeopardizing the entire journey. This is the key idea of Simon's procedural rationality: goals that people strive for are accepted as the rules of the game by default, and economic theory explores how, playing by these rules, can win.said Pareto, before going out to sea, they made sacrifices. Now we know that there is no relationship between a killed lamb and good weather, so this behavior seems irrational to us. But for the ancient Greeks, it was completely rational, since they believed that this connection was. It would be irrational just not to make the sacrifice, jeopardizing the entire journey. This is the key idea of Simon's procedural rationality: the goals that people strive for are accepted by default as the rules of the game, and economic theory explores how, playing by these rules, can win.said Pareto, before going out to sea, they made sacrifices. Now we know that there is no relationship between a killed lamb and good weather, so this behavior seems irrational to us. But for the ancient Greeks, it was completely rational, since they believed that this connection was. It would be irrational just not to make the sacrifice, jeopardizing the entire journey. This is the key idea of Simon's procedural rationality: goals that people strive for are accepted as the rules of the game by default, and economic theory explores how, playing by these rules, can win.because they believed there was this connection. It would be irrational just not to make the sacrifice, jeopardizing the entire journey. This is the key idea of Simon's procedural rationality: goals that people strive for are accepted as the rules of the game by default, and economic theory explores how, playing by these rules, can win.because they believed there was this connection. It would be irrational just not to make the sacrifice, jeopardizing the entire journey. This is the key idea of Simon's procedural rationality: goals that people strive for are accepted as the rules of the game by default, and economic theory explores how, playing by these rules, can win.
After Simon created the theory of bounded rationality and the concept of the rationality of procedures, research at the intersection of economics and psychology began to develop rapidly, studying how people deviate from rational behavior. The most famous scientists in this area are Amos Tversky and Daniel Kahneman, who discovered that there are patterns in thinking errors and they can be grouped by type. They called these types cognitive biases. In addition, Kahneman and Tversky suggested that really thinking is difficult and energy-intensive, and people tend to avoid it whenever possible. There are well-established thought patterns that can be used satisfactorily in most common situations, and people use them in their daily lives. After all, the likelihood that the situation will be atypical is low,but if you do not use them, you will have to think for sure, but thinking is hard. Remember the example of a primitive man and a suspicious bush? Running from strange bushes is just such a pattern of thinking. Kahneman and Tversky called these thinking patterns heuristics and found several different kinds of heuristics, and scientists these days keep looking for more and more.
It turned out that since there are regularities in deviations from rationality, the new theory of bounded rationality lends itself to mathematical analysis, and individual hypotheses can be tested using experimental economics. It would seem a trifle - the transition from the idea of maximum results to satisfactory ones, but this trifle became a huge leap forward in studies of human behavior, breaking almost a century and a half of spherical horses. Simon reconciled reality and theory. Of course, he did not create a complete and all explanatory theory of human behavior - people are still very complex and different, and we still know very little about how decisions are made. But now we still know a little more than before, and most importantly, we are building the theory on a more realistic basis. Moving away from the premise of a rational egoist,Seeking to maximize utility, Simon has stepped onto uncharted land, a journey that does not promise to be easy and enjoyable. The Homo economicus model is an excellent example of how disciplines that study overly complex systems that, at this stage in the development of scientific thought, are not amenable to sensible empirical analysis, find a way out. We started with something very simple and notoriously unrealistic, and gradually bring the model closer to reality, one simplified premise at a time. The road is not close and not always clear, but we are moving in the right direction. Probably.at this stage in the development of scientific thought, they are not amenable to sensible empirical analysis. We started with something very simple and notoriously unrealistic, and gradually bring the model closer to reality, one simplified premise at a time. The road is not close and not always clear, but we are moving in the right direction. Probably.at this stage in the development of scientific thought, they are not amenable to sensible empirical analysis. We started with something very simple and notoriously unrealistic, and gradually bring the model closer to reality, one simplified premise at a time. The road is not close and not always clear, but we are moving in the right direction. Probably.
At this stage, you may have a question: okay, economic theory figured out one of its problems - this, of course, is great news, but what about me, an ordinary person? The fact is that the idea of rationality has been one of the key elements of economics for so long that it is firmly rooted in the ideas of ordinary people about the market, the financial world and themselves. One prominent economist, Robert Heilbroner, once wrote a humorous book on the history of economic thought and called it Philosophers of This World. As you might guess from the title, he believed that economists are something like applied philosophers, thinkers whose sometimes lengthy reasoning has a very real impact on the life of ordinary people. Be it Marx's Capital, on which the steam locomotive of the revolution rode better than any coal,or Keynes's ideas about the benefits of government intervention in the economy, which provided the scientific basis for Roosevelt's plan that brought the US economy out of the Great Depression - the ability of economists to influence the minds of people can hardly be overestimated. The homo economicus model was born in an age of colossal belief in human capabilities, and although we no longer believe that in 20 years we will colonize Mars and build a time machine, many of us continue to believe in the limitless intellectual abilities of humans when it comes to economic life. When someone does an economic stupidity, it is often associated with his personal failure in this particular case. Of course, it was a stupid idea to take an iPhone on credit, but it's much easier for us to say that such an act was the stupidity of an individual person than to admit that we are all arranged in such a way that we do this kind of stupidity,whether it is spontaneous purchases, unreasonably risky investments, or the inability to resist 2-for-1 stocks. It's nice to think that it's worth learning a little, pulling yourself together, buying more trainings and self-help books on financial literacy, and we will be able to reach the level of the economic man Adam Smith and always make balanced and optimal decisions. It’s unpleasant to abandon that thought — after all, we now know that economists had their own reasons for holding on to homo economicus for almost two centuries. However, if even scientists were able to admit the imperfection of their theory, to declare: yes, okay, we give up, people are really not ideal machines for getting pleasure, then we can too. And here's the good news for you:Although behavioral economics does not offer the comfortable haze of believing in our intellectual invincibility, it has already found quite a lot of patterns in our thinking errors. And the experiments carried out show that if we know about them and periodically double-check our decisions, we can learn to maneuver in our economic (and not only) life so as to avoid the most dangerous reefs. At least sometimes.
: (Veeam)