Ecce Homo

Behold the man!

But which man?

My professional journal this week had an article in it about Economics and Human Nature. It postulated that most classical economic theory is based on the concept of homo economicus, the idea that economic actors are perfectly rational beings.

Here's a quote from a Nobel Laureate economist from the Univerisity of Chicago: "All human behavior can be viewed as involving participants who maximze their utility from a stable set of preferences and accumulate an optimal amount of information and other inputs in a variety of markets."

Oh, sure, you betcha. Dat's vat I alvays do, ja.

Well, no.

Homo Economicus would be like Mr. Spock, completely rational. The rest of us are hopelessly emotional homo sapiens (and some days barely even qualify as that.) We deal with economic decisions emotionally and irrationally. We undervalue some options and overvalue others, depending on things like: whether we are buying or selling, saving money or losing money, acting in public or in private, alone or in a group.

The article's thesis is that we are predictably irrational. :) Yup.

Statistics do show that people engage in crazy financial behaviors, and do so with surprising regularity. So economics is now moving from expecting the logical behavior of the rational, to guiding the illogical behavior of the irrational. They've discovered that there is more power in a negative message than a positive one.

If people are told that they will lose $350 a year if they don't practice energy conservation, they are more likely to conserve than if they are told they'll save $350 a year. If people are told of the increased risk of death by not practicing self-examination for cancer, they are more likely to self-examine than if told of the likelihood of longer life. People are willing to pay more to keep from having an item taken away than they are to acquire it. Fear of loss is actually more effective as a motivator than anticipating gain.

I guess the politicians and advertisers have had it right all along. President Bush had people afraid of terrorism and extremism, and President Obama is keeping us afraid of economic collapse and uninsurability. And because we are predictably irrational... it works.