A New Philosophy for Economics
By Jennifer Ghandhi
Did you ever wait until the last minute to finish a project? Or buy a lottery ticket even though you realized that the odds of winning were slim? You knew you would have been happier not procrastinating and better off pocketing the dollar. So why didn’t you?
Traditional economic theory has a difficult time solving this riddle. For more than two centuries, economists have based their models on the principle of rationality—the idea that we make decisions by ranking options in order of preference and then satisfying those preferences to the greatest extent possible.
But of course we don’t always do that: We also gamble, procrastinate, accumulate credit card debt, smoke, abuse drugs—making all kinds of decisions that perhaps offer short-term thrills but that we ultimately regret, says Erik Angner, Ph.D., an assistant professor in both the Department of Philosophy and the Department of Marketing, Industrial Distribution, and Economics.
Enter behavioral economics, a growing subfield of economics that is drawing from modern psychological research and old philosophical insights to produce models that more accurately reflect the decisions that we actually make. Behavioral economists are also increasingly helping executives and politicians make more informed decisions on policies that affect us all.
“The current financial crisis has economists on both ends of the political spectrum acknowledging that the rational choice model of human behavior is less than perfectly suitable for public-policy making,” says Angner. The economic advisors of President Obama include several behavioral economists, Angner notes, and they are bringing new research to bear on everything from health care to environmental concerns.
Gain Without the Pain
Behavioral economics research is helping to identify the less-than-rational thought patterns that drive many of our actions—including our inability to save for the future. For example, consider two situations: one in which you lose $10 on the sidewalk, and another in which you find $10. Intuitively, we assume that gains and losses cancel each other out, but studies show that a person’s unhappiness at losing money is greater than his or her happiness at finding it. In other words, says Angner, “People seem to suffer more from losses than they enjoy commensurate gains.”
This phenomenon, known as loss aversion, is now the basis for a program designed to help increase retirement savings. “Rather than asking employees, ‘Do you want me to take out retirement money from your paycheck now?’” says Angner, “employers ask, ‘Next time you get a raise, do you want me to take some fraction out and put it into a retirement account?’” People are more likely to agree to the latter, he explains, because then the money that’s put into the retirement savings is perceived not as a loss but as a foregone gain.
Meeting of the Minds
UAB has been offering a course on behavioral economics since 2006, says Angner. But students interested in the brave new world of economic theory don’t have to stop there. The College of Arts and Sciences and the School of Business jointly offer an interdisciplinary concentration called Philosophy and Political Economy, which roams the intellectual borders of economics, philosophy, and political theory.
Several UAB faculty members specialize in the philosophy of economics, giving the university one of the largest concentrations of expertise in the country. Angner is currently in the process of writing a book on behavioral economics with Carnegie Mellon University’s George Loewenstein, Ph.D., who is considered one of the pioneers of the field.
Angner, who holds doctorates both in philosophy of science and in economics, says the combination is a natural. Economists are seeking to update their models with a more precise understanding of the inner workings of the human mind, he says—and that is precisely the specialty of philosophers. “They have explored what it means to be rational for two and a half thousand years.”