Economics Nobel 2017 for Thaler

Actualizado: 12 de dic de 2018

Returning from a workshop in Uruapan, I found this interesting news. Thaler, another professor at the university where I studied and one of the founders of Behavioral Economics, receives the Nobel Prize in Economics.


The interesting thing is that Behavioral Economics emerges from allowing people's non-rational behaviour in economic models. According to the Royal Academy of Swedish Sciences, Thaler "has incorporated psychologically realistic assumptions into the analyses of economic decision-making". And one of the main criticisms of conventional economics is the assumption of rationality! 


Is it a good sign that economists are finally opening up to another discipline like psychology? Does the fact that these ideas reach the mainstream means a "breakthrough" in economic science? NO! Not at all! In a fundamental sense, I am going to argue that it is nothing new under the sun.


I recommend this link to anyone who wants to investigate a little more about this field. Thaler's award note at the University of Chicago here.


In a sense, Behavioral Economics is an extremely attractive field because it invites you to reflect on the systematic ways in which human behavior tends to be non-rational; and at the same time it invites you to consider what exactly rational behavior is.



As an introduction to the subject, I briefly mention two examples of non-rational behaviour.


  1. People suffer more when they lose what they already have than what they enjoy gaining something of equal value that they did not have before. It may be called an aversion to losing, or a bias in the willingness to lose, versus the willingness to win. Hypothetically, if someone with an aversion to loss competes with someone who does not have this bias, the unbiased person will have a better chance of winning in the long run. That's why it's considered non-rational behavior.

  2. Inconsistencies between the long-term decisions one makes (e. g. quitting smoking), and short-term decisions. Neuroeconomic models, for example, explain that one part of the brain is responsible for long-term planning, and another different part faces immediate decisions, in the here and now. Mathematically, these models consider hyperbolic intertemporal discount rates, which in simple English means a disproportionate bias towards the immediate versus the distant future. So that decisions you plan ahead, when the time comes you change them systematically, generating inconsistencies of an irrational nature in behavior.


It is worth mentioning that whenever there is irrational behavior, within the narrative of our modern science, there is something to correct at the same time. That is to say, the look that if it were possible to rectify your behavior to the rational, you yourself would be happier. For example, in the second example above, if there were an external force, some authority that would compel you to maintain your long-term decisions so as not to succumb to the temptations of the short term, you would be happier. (Of course, that means that happiness has more to do with the planning mind than with immediate satisfaction, something that is of course debatable).


A series of implications are very interesting to reflect on. A first fundamental point is that non-rational behavior is seen, throughout this field of economics, as a weakness, as something to overcome; and that as humanity progresses in its intelligence, our behavior will become closer and closer to rational behavior. “R. Thaler was awarded the Nobel Prize in Economics for clarifying how human weaknesses such as lack of rationality and self-control can affect markets"(elfinanciero.com.mx, the bold is mine). Rational behaviour is therefore an ideal.


A second fundamental point is that rational behaviour is presumed to exist, which is at least questionable. If you pause a little, you realize that it's just an abstraction, something that is intellectually conversed while having a cup of coffee with cookies in a seminar, and that makes sense only within a narrative about reality. What narrative? The reductionist narrative that assumes that there is an objective reality. This is just a cultural belief. Extremely heavy indeed, but it's still a cultural belief. It's not a truth of life.


The truth of life is far more elusive and irreducible to mere intellectual understanding. Just as objective reality does not exist, neither does fully rational behavior exist, not even as an ideal. (This topic is a big deal and I may have to write more about it later; for now I hope to express a panorama, a look that liberates. For a deeper understanding see the related post Human Reason).


Under the idealization of rational behaviour, it is justifiable to apply public policies that rectify people's behaviour. The logic would be that people need mechanisms to correct their behavior in order to bring them to their own greater happiness, which they do not achieve on their own because of their limited intelligence. Naturally, here is born the ethical suspicion (and further justified by the bad reputation of governments), of allowing a governing authority to "improve" the free decisions of people, no matter how much they may be against their own good.


In any case, this is already happening! For example, in policies that require cigarette packets to show the terrifying effects on health. This may help people who actually decide not to smoke any more, but it is very difficult for them to maintain their decision. Similarly, with or without specific knowledge of economics and psychology, private companies are already explicitly or implicitly addressing the irrational weaknesses of consumers with their marketing strategies. This is nothing new, the novelty would be that they now have more precise engineering for their marketing programs thanks to Thaler (I don't think this is his intention).


Perhaps some reader is thinking at the moment: "we have to improve the rationality of people so that marketing strategists don't take advantage of their weakness". Nothing further from what I want to express! In the example (1) I mentioned above, about the aversion to losing, I would like to make an interesting observation, which I hope will tear down schemes. If you have an aversion to losing, you have two possible routes. One is intensively studying the rational paradigm, and behavioral economics, (I "recommend" to enroll in a phd program in economics for it), so that you develop so much your understanding of your rationality and your irrationality that by exerting control over yourself you "overcome" all irrationality in yourself.


A second possible route is as follows. Perhaps you have an exaggerated longing for security, and therefore you miss opportunities to be happier. Maybe you have a low tolerance for change. You're just scared. You can choose to feel your fear, and release it through feeling.


Which way do you prefer? The first of reason and control over yourself? Or the second of freedom and sincerity to feel what you feel? In my experience, the second route takes you further.


An even more profound and thought-provoking observation is the fact that scientists who observe and model the irrational behaviour of people are (ilusory) fully rational in their observation. Their observations, hypotheses, theories, their way of writing, their manner of conversation, their contemplation per se, are fully situated within the idealized rational paradigm. (While drinking coffee and eating cookies at seminars). Note the size of this contradiction: to observe the irrationality of the real world, from an abstract rational narrative, i. e. unreal. It would be more "reasonable" to observe the irrational from an irrational yet realistic narrative.

Thaler told the award committee (theguardian.com) that he "planned to spend the prize money irrationally". What an interesting joke. I don't know if Thaler really meant this, but anyone would be happy to receive a gift of a lot of money that was indeed so unexpected, that it would give you license to be irrational. Permission to not make any calculations, to relax, to rest. To celebrate life.


Because, on the other hand, in the conventional culture we live under the weight, under the exigency of being rational. With our salary we have to be rational and plan for the long term, to ensure our old age and the future of our children, etc. Things that give you peace of mind, true, but that take such an effort of cold reason, that if we were honest with our human soul, we detest.


If we "had permission," we would never want to live life rationally.

I know this has many implications for discussion and reflection. I'd love to cover them all, but I'd have to write all week. For this fundamental reason, the 2017 Swedish Academy economics Award is NOT good news: the idealization of rational behaviour has not been questioned, but rather strengthened.


Recognizing the lack of rationality in people, is done only with the programming that someday human behavior becomes rational. At the cultural level, it only reinforces people's efforts to improve the rationality of their behaviour.


It is even attractive, thanks to the observations of behavioral economists like Thaler, to realize the various ways in which our behavior is weak, irrational, and devote ourselves to becoming more rational in life. A grave mistake for those who are interested in freedom and happiness.


Certain characteristics of behavioral economists as researchers are very interesting indeed. In this respect, yes, this Nobel Prize is good news. Characteristics typical of children, and very rare in conventional economists: their ability to distract themselves from the assigned task, a sense of wonder, a tendency to ask embarrassing questions, and a distrust of adults' ideas about which issues are worth thinking about and which are not (bloomberg.com). This is undoubtedly the way to enjoy the beauty of the mind, to think the unknown.


The only problem with this is that when the thinker becomes very full of thoughts that fascinate him, he no longer admits a profound questioning. Rather, in the face of such fascination, he easily forgets what thoughts are at the base of all the rest of his thinking. So that it becomes very difficult for him to consider new understandings, new avenues of thought, new stories of life (truly new).


My deepest passion is to question the validity of the rational paradigm.

Not just because of his falsehood or how absurd it is. But more than anything else because of the unhappiness that permeates our lives as we place our soul's trust in reason. On the other hand, I enjoy the beauty of thinking like everyone else, and the surprises that life has in store for us no matter what path we choose. For example, I hope that behavioral economics will help people quit smoking. It is welcome to include in electricity bills, the value of your neighbours' average electricity consumption, so that it induces people who consume a lot to consume less (this is an example of a positive idea from this field of economics).


It is also welcome that thinkers think too much, and become fascinated and glorified in their intelectual achievements. No problem and no criticism to them. Sooner or later, when your intellect has been satiated, your own soul will ask for a more sublime wisdom.