-By Shivam Sharma(Guest Blogger)
Aloha strangers on the internet!
In this blog, I am going to attempt the impossible by making two scary sounding words interesting to you and in the process (maybe?) educate you about human psychology.
That topic is “behavioral economics”. Now as I type this article I realize how scary this looks to a person who hasn’t seen this word before. It’s the universally dreaded word economics preceded by an even bigger word. So let us begin.
According to Wikipedia (what would we do without it) behavioral economics is defined as “method of economic analysis that gives psychological insights into human behavior to explain economic decision making”. Wait is that supposed to mean. Basically, while economics studies the patterns of decision making by rational economic entities, behavioral economics studies the actual humans who make mistakes most of the time. To me, the basic difference between the two terms is that economics assumes that humans are rational beings who always make decisions which maximize their well- being, whereas behavioral economics acknowledges that homo sapiens (us humans) is a species that makes both good and bad decisions. They don’t always maximize well -being and make mistakes sometimes.
Behavioral economics maintains that our brain is primitive and flawed and we are susceptible to what are known as cognitive biases (error in judgements). To explain these biases, we have to understand our brain is made of two systems 1&2. In my opinion they should have come with a more interesting name but who is complaining 😝.
Let’s talk about system 2 first. It is the goody two shoes part of our brain. It is the one which labors to make plans, knows how to solve complex mathematical problems, knows short term sacrifices lead to long term gains. But sadly for us it has very little control over us. We are controlled by the lazy, selfish and easily deceived system 1. We can see the functioning of both systems in our day to day experience. During exams, our system 2 makes plans and is ready to sacrifice comfort for few weeks for long term gains and prepares meticulous plans for us to follow, then system 1 takes control and we end up sleeping 12 hours a day and spending our every waking minute watching obscure YouTube videos.
Economics assumes that our system 2 is the dominant part of our brain and thus postulates that most of the time we make right decisions. But behavioral economics knows that system 1 is dominant. According to economists ; saving money, exercising and eating better should come easily to us but social scientists and behavioral economists know that our chimp brains will almost always go for the instant gratification and procrastinate the difficult decisions indefinitely.
System 2 is very lazy. It is only active when its need is dire. That makes sense because involving system 2 in day to day functioning of our lives requires effort and energy and we all know that they are perhaps the most important assets in our lives, right after our mobile phones. Thus system 1 has most control in our lives. But the problem is that our system has had the same wiring for thousands of years. We are a new laptop running on the windows 2000.
Back in the hunter gatherer days our main 2 worries was how to reproduce and how to not get eaten by a polar bear. And the same instincts and thinking patterns are still governing our lives. So, the next time you are faced with a choice between short term pleasures and a choice involving hard labor, know that your system 1 is active and will almost always choose the badsuggestion for the short-term pleasure and maybe knowing this will help you better your lives.
So that’s it on my part. If you found the topic interesting and want to know more, I suggest reading these books:
1) Thinking fast and slow by Daniel kahneman (he is a Nobel prize winner)
2) Nudge by Richard thaler
Aloha(that’s both hello and goodbye)!
Thank you for reading. Do write your thoughts in the comments section. Hope you enjoyed it.