Behavioural Economics - what the term means is rather simple - it is the study of the effects of economics and psychology to understand the way we act and behave under economic decision-making.
Of course, in an ideal world we as people act in a way that provides ourselves with the most optimal decision that provides the greatest benefit in mind - the homo economicus. In contrast to behavioural economics, we examine biases, and emotional, cognitive, and social factors of individuals as well.
The division of labour, the virtues of the market, and the “human natural propensity to truck, barter, and trade” are all ideas mainstream economics clearly associate with the so-called “father” of this social science that we are familiar with today. These claims have risen from the extensive study, by generations of economists since 1776, of “Wealth of Nations”, the well-known magnum opus of the Scottish professor, which is regarded as one of the most significant books in all history of economics. But although it is interesting to know this, how does this information relate to nudges?
We may remember Adam Smith’s work as the purely rational and egoistic view of the individual, however, when we look better at his work, we may find a fascinating theory of human behaviour that looks anything but self-interested. So, regarding the author’s first published book, The Theory of Moral Sentiments, Smith shows that our moral ideas and actions are a product of our very nature as social creatures. Instead of reason, it is social psychology that becomes a better guide to moral action: For the professor, the behaviour will be determined by the struggle between “passions” and the impartial spectator” (basically the way we see our own behaviour from the perspective of an outsider).
The human that Smith talks about is far from a rational and robot-like creature that makes the most optimal decisions and paths. In his book, Smith makes a strong case that empathy is a strong feature of human behaviour - we often mimic emotions, whether they are happy or sorrowful, of course to some extent. Society prospers from order and rewards cohesion, and not all action derives from a perfect solution.
As such we need to remember how we are more easily influenced by the actions of others or our own biases than we might think. There are three main groups that Smith’s work can be read into: socially, economically, and morally.
Socially, Smiths say that we, as humans, have the craving to be liked and sympathized with as mentioned previously. Considering economics, we might need to focus more on our own self-interest which helps support the invisible hand and trickle-down business.
The goal of bringing such a classical thinker into the Behaviour Economics debate is such that the biases or behavioural anomalies that we know today may be way more ancient in the economic literature than we may think (even so that have been here since the beginning). So, approximately 200 years before Kahneman and Tversky, Adam Smith already discuss themes that later became known as “loss aversion”, “self-control”, or “overconfidence”. For example, regarding this last concept, Smith talked about the “over-weening conceit which the greater part of men of their abilities. The chance of gain is by every man more or less over-valued, and the chance of loss is by most men under-valued, and by scarce any man, who is in tolerable health and spirits, valued more than it is worth”
In conclusion, given that Adam Smith’s world is far from a rational-oriented world, this analysis is a great opportunity to understand what are, maybe, the lost foundations of Behavioural Economics and Nudges. Also, it is a gentle reminder that, in a period of the constant influx of information, it's still always a good time to look back to the classical authors and learn from the analysis of the past.
Written by: José Allegro & Siripong Franzen
References:
Loewenstein, George, Nava Ashraf, and Colin Farrell Camerer. “ Adam Smith, Behavioral Economist ,” February 2005. https://www.researchgate.net/publication/4981727_Adam_Smith_Behavioral_Economist.
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