In your economics classes you would have become quite familiar with the notion of homo economicus – that humans are rational economic agents each acting to maximize their own individual gain. TEXT: MARGARET SAMAHITA BILD: JOSEFINE VON UTHMANN
to take advantage of a year-long gym contract; because the profit-maximizing gym owners are rationally depending on your irrationality. They offer exactly the kind of contract they know will be most enticing to us: high up-front fees, low to zero price of attendance, and high switching costs knowing that most of us will barely show.
This notion underpins most successful economic models, including the classic supply and demand theory; and indeed, even Adam Smith himself recognized such self-interest to be the driving force behind the free market*. However, there are innumerable examples of individuals dispensing of their money and time in less than rationally selfish ways. What of those who give to charity? Or those who volunteer their services to student nations or unions? Or even those who buy expensive gym memberships, only to show up once in the first week of January and spend the rest of the year staring guiltily at their unused gym bags?
Thankfully, our irrationality toward self-gain allows for a greater sense of morality and equity in society. An often cited example is the so-called ultimatum game, in which two players interact to decide on how to divide a sum of money between themselves. Player 1 must propose a division, and player 2 can either accept or reject this proposal. If player 1’s proposal is rejected, neither player receives anything. Standard economic theory (or a good dash of common sense) will tell you that the equilibrium solution is for player 2 to accept any proposal in which they receive some nonzero sum; for anything is better than nothing. Backward induction would then suggest that a rational self-interested player 1 would always offer player 2 the smallest required amount to induce player 2 to accept, say 1 krona, while keeping the vast majority of the profits to himself. However, in many experiments repeated around the world, a significant number of people acting as player 1 offer fair 50:50 splits! Moreover, people acting as player 2 often reject offers of 20 percent or less, even though doing so forfeits any gain from the game. It seems that we humans do not always act rationally in our own self-interest: both those proposing and those receiving in the ultimatum game seem to have a preference for fairness, at the expense of monetary gain.
Enter: Behavioral Economics
This kind of questions spawned the field of Behavioral Economics; the intersection between economics and psychology. As implied by the name, behavioral economists seek to understand the complex relationship between the economic and psychological elements of people’s decisionmaking; hoping to move closer to explaining their seemingly irrational behaviors. An important first step is to realize that we are as a species genuinely irrational; for instance possessing far less self-control than we would like to credit ourselves. A study has found that many gym members pay a high monthly fee while barely even attending, and consequently pay a high amount per visit. If they did not intend to go to the gym often, it would have been far more rational to have saved a considerable sum of money by simply buying single passes. Sound familiar? Behavioral economists DellaVigna and Malmendier (2006) have put this down to humans’ overconfidence of future self-control. When gym attendance involves immediate costs (exercising when you least feel like it) and delayed benefits (perhaps better health in the distant future), our timeinconsistent preferences cause us to overestimate our resolve: saying we would exercise tomorrow, and when tomorrow comes preferring to do something else instead. This is definitely something to consider next time you are nearly persuaded
What I do now
My research currently focuses on exploring the role played by self-image in individual decisionmaking. For example, why is it that young people often spend a small fortune to travel overseas for volunteer programs, when the same amount of money could simply have been sent over and used to rally a small army of laborers? In many
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