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Behavioral Economics

Entry 1791, on 2016-05-18 at 22:01:16 (Rating 2, Comments)

I don't like labels, but if I was going to label my own preferences on understanding the world I might use something like rationalist, atheist, or empiricist. Especially empiricist, because I don't think we can take any idea seriously until it is tested in the real world.

That is one of the reasons that I don't like religion. Religions have a revealed knowledge which is assumed to be true but is never tested. And even if some real-world facts do happen to encroach on the accepted dogma they can be conveniently disposed of with faith.

And I used to have the same criticism of a lot of social sciences, especially economics. It seemed to me that economics is based on interesting theoretical ideas that have little connection with the real world. The real problem was that no one even tried to establish the ideas' truth, so while they might have been true, there was no real way of knowing.

But after recently reading some books on the subject of behavioral economics I now hold the subject of economics in somewhat higher regard because I realise at least parts of it make an attempt to establish real world facts through empirical testing and experiments.

Most recently I read Dan Ariely's book, Predictably Irrational, which describes a series of experiments with real people in situations which reveal the genuine way people react rather than the way conventional economics says they should react. Here's a hint: they are completely different.

So realising that there are some branches of economics which try to take account of the way real people act was good but realising that most conventional economic and political practice is based on the old economics - the one based on interesting theoretical ideas which might or might not describe the real world situation - is bad.

The book "Predictably Irrational" has a number of chapters describing experiments involving different aspects of economics but I want to concentrate on one in particular in this blog post. The one I have chosen this time is people's moral behaviour, especially in relation to cheating. So here's a few of the more interesting points...

The experimenters asked their subjects to perform a skill task and be paid for the number of questions they got right. One group showed their results to the person in charge and were paid based on their performance. Another group scored the test themselves and asked for the appropriate payment based on that. Note that only the second group had an easy opportunity to cheat by lying about their real score.

Of course the second group scored better than the first (and were paid more) and since the participants were chosen at random the most likely explanation wasn't that they were better at the task but that they cheated! Interestingly, they didn't cheat fully and ask for payment for a perfect score, they just added about 50% onto their real score.

So people engage in moderate amounts of cheating when they get the opportunity. How could this problem be resolved? In another experiment the subjects were asked to recall the Ten Commandments before doing the test. They didn't need to actually know them, just think about the fact that they exist. And guess what, in this situation the second group didn't cheat at all. There wasn't even a small increase in the second group's scores over the first.

So is this a good reason to bring back religion? Well no, not really, because after being questioned it turned out that a lot of the subjects couldn't even list the Commandments. And a further experiment asking participants to accept the "MIT Honour Code" before doing the experiment also gave a zero cheating result - even though MIT doesn't actually have an honour code!

So it seems that making people think about "doing the right thing" prior to making a moral decision is enough to prevent cheating.

What does this have to do with economics and politics? Well there is a possibility that the poor standards of morality seen in professions today is a result of the professionals moving to a market model rather than a social one. In market models maximising profit is the primary objective and fair play and moral standards tend to be forgotten.

In the US during the 1960s many professions, such as medicine, law, and accounting, were largely deregulated and opened to market forces. Yes, this is the same market force model espoused by the "old economics" based on theory (or maybe ideology or dogma would be better words) rather than reality.

Since that change doctors order diagnostic tests which they just happen to have the equipment for, just to make extra cash; they prescribe drugs made by companies who give them gifts instead of what is best for the patient; and they perform unnecessary procedures for the money. In other words, their ethical standards have dropped significantly.

Of course, I'm not saying that all doctors cheat, just like not every participant in the experiments cheated, but the rate of cheating has increased greatly and surveys of professional organisations show that the members know that things are bad. In one survey half of the lawyers questioned said they wouldn't follow that profession if they had to make the choice again.

And these experiments were just a small part of the case against conventional economics. The main point of the book was - as the name suggests - that people don't act rationally and when they do act irrationally it is in predictable ways. The conventional assumption that people will act rationally in their own best economic interests is just not true.

But a discussion of those other experiments will need to wait for another blog post. This post just shows that if we want people to be more moral they should think about the Ten Commandments more, or the MIT Honour Code, or the Jedi Code, or whatever else they prefer, it makes no difference!

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