Behavioral economics and the question of rationality

Behavioral economics - a very popular economic "direction" of recent years. A mix of psychology and economics, which in many ways opposes classical economics. One of the cornerstones of behavioral economics is a thesis that stands directly against classical rationality - behavioral economists claim that one often behaves irrationally, based on emotion. He thus questions many attitudes and theories of classical economics. However, emotions are irrational, there is an "opposition" theory of rationality right?

Envelope - How Expensive is Free (Dan Ariely)
Envelope - How Expensive is Free (Dan Ariely)

Dan Ariely dedicated his entire book, "How Expensive is Free," practically just to confirm the thesis that one often behaves irrationally. It often shows that people make decisions based on emotions (some behavioral economists even scan their brains because of this), proving that people behave irrationally because "emotions are not logical," that is, "emotions are not rational."

If this is really the view that permeates the whole field of behavioral economics, it means only one thing - behavioral economists have not understood what rationality is.

What is rationality?

So let's answer this question now. The rationality of man lies in the fact that man acts according to his decisions. These decisions may subsequently turn out to be wrong, but this does not mean that the decisions were irrational - the important thing is that one subsequently he does not repeat his mistake.

It follows that rationality is based on knowledge, experience and skills. All of this determines human behavior, that is, it all it makes it rational.

It is important to realize the rationality of man it is not a state of man. Man's rationality is constantly evolving and improving. Man is therefore only rational as an individual, the group does not have to behave rationally, because the group is usually "too young" for the group to gain experience. If an individual is "left to himself", he behaves rationally, so as a result, the group behaves rationally - but only if each individual is left to himself and his decision-making is independent of the group.

Rationality is a process continuous acquisition and application of experience and knowledge. Because man is only rational as an individual, rationality is "created" in each new individual over and over again. That is why we can encounter mistakes that are "typical" for a person, classic pitfalls that everyone "goes through". There are experiences that are irreplaceable by an education that is too rational. Rationality is - quite logically - also formed on the basis of emotions, because experiences are often strong emotionally burdened. And for this reason they are emotions rational.

If emotions are rational, we cannot find them universal rationality of man, the rationality of every human being is unique and individual as well as the unique and individual experiences and emotions that those experiences evoke. In other words, what is rational for one person is often not rational for another. We can find the same elements of decision-making (rationality), because some knowledge can be acquired on the basis of the same information. We can also find the same mistakes that were part of creating human rationality. However, the result of human behavior is actually irrelevant to the question of rationality - it is important to move towards the goal, not the goal.

Rationality is that one tries to avoid wrong goalswhich he came to by some procedure. By man won experiencewhich is affected by emotions. Emotions are influenced by personal preferences and motivations, which are shaped and influenced again by experiences and emotions. Primitive preferences and motivation are formed in a very early childhood.

If an individual finds the procedure he has chosen to achieve some goal (success) led to another (wrong) goal, one does not choose the same procedure again. He chooses another procedure - but it is possible that this procedure will not lead to another wrong target, but human rationality ensure that one does not use the same procedure again. It does not meanthat one cannot reuse another procedure that leads to the wrong goal. If it turns out that the goal is within human abilities unreachable (the chosen procedure will always be wrong), human rationality Sooner or later they will ensure that changes the target. Changing the destination again depends on abilities, knowledge and experience, including emotions. And we are at the beginning again.

Emotions, personal preferences and motivation we shape our whole lives. It actually costs us a lot of time to shape them, time and mistakeswhich shapes our emotions, personal preferences and motivation. Ours emotion they are actually investment. One wants some investment yield. The yield from emotions is theirs use, which can bring us some profit. That is why people, for example, vote for certain policies over and over again - they have been convinced of why to vote for too long. They invested their opinion, argued it and made mistakes. These are all too big investments to make people thrown in vain. This is why people often behave emotionally. The important thing is that it is not irrational.

How expensive is it free?

Dan Ariely in his above-mentioned book (pictured) he shows an example in which he wants to show "irrationality" in human decision-making:

In one experiment, Kristina Shampanier (MIT) and I started making chocolate. We set up a large table at the entrance to the school and started offering students two types of chocolate - luxury Lindt pralines and famous Hershey meringues. Above our "shop" we put a big sign "1 customer = 1 chocolate". As you got closer, you saw both the types of chocolate and the prices we wanted for them.

...

First, we set the price at 15 cents for the Lindt praline and 1 cent for the Hershey kiss. the customers behaved very rationally: they compared the taste and quality of the meringues with the Swiss pralines and decided. About 73% of them reached for a Swiss delicacy, 27% bought a cheap kiss.

And now let's see how the magic word FREE changed the situation. We reduced the price of both products by a cent, so Lindt pralines were now for 14 cents and meringues for zero. … After all, the price difference remained the same as before.

However, the free magic word caused a miracle! Hershey's modest kiss suddenly became a big favorite. Suddenly, 69% of customers chose it, which is a rapid increase compared to the original 27%. In contrast, Swiss pralines fell from 73% to 31%.

What actually happened? Ariely said that people began to behave irrationally and that classical economics was not enough for this situation. It is a mistake.

Although the price changed evenly, the purchase cost changed. What is such a cost? When the Hershey kisses cost 1 cent, the students had to sacrifice 1 cent to make the kiss. There is a certain sacrificial value behind 1 cent. That value is a sacrificial opportunity.

At the same time, however, a student who buys a Hershey kiss for 1 cent will benefit from this kiss. Now he will start working here consumer surplus - from overall benefit, which we get by consuming Hershey meringue, we imaginarily deduct the "sacrificed benefit" that we sacrifice by spending one cent and not buying a Lindt praline - we get the "consumer's surplus" from the purchase of Hershey praline. Subsequently, we subtract the "sacrificed benefit" from the total benefit of the Lindt praline, which we sacrifice by spending fifteen cents and not buying the Hershey meringue - we get the "consumer's surplus" from the purchase of the Lindt praline. Subsequently, we compare the two "surpluses" and choose the one that will personally bring us "greater benefits" (ie a greater "surplus"). Obviously, Hershey's meringues are not worth a penny compared to the Lindt praline (if I take the prices from the example).

How do I explain the "mysterious change" from the second part of the example?

Let's say, what is the sacrificial opportunity for Hershey's kiss? It was definitely not 1 cent anymore. So now we subtract only from the total benefit consumer surplus for buying Lindt pralines. Why just the resulting surplus? Because I don't sacrifice the one cent for Hershey's kiss, which in the first example I could use either to buy a praline or to buy a kiss. So I only compare here overall benefit of Hershey's meringue a consumer surplus benefits from Lindt praline. The problem with the Lindt praline is therefore that it is too burdened with a price that significantly reduces its "surplus benefit". Yippee rational, that the students chose mostly Hershey's kiss.

The result that Dan Ariely interprets is based solely on his personal preferences and experience. Let us hope that he learns from this quickly enough that he will act rationally quickly enough. Because otherwise the further development of a behavioral economy could have far-reaching consequences for society as a whole and for economic policy around the world. Is another "great economic dispute of the century" approaching?

0 comments

  1. Dan Ariely is right in this case! In that justification, before the discount, the sacrificed benefit of the Lindt praline is deducted, and after the discount, only the consumer's surplus, ie. Lindt benefit - 14 cents. Have the author document the table and then it will be clear that it floats on water…

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