Saturday, September 18, 2010

Nudging Humans Toward Economists

I recently came across an article in the medical journal The Lancet about how economists try to understand humans:
Early in their engaging book, Nudge, Richard Thaler and Cass Sunstein draw a distinction between Homo economicus, a species whose members they refer to as “econs”, and real people, whom they refer to as humans. “Homo economicus can think like Albert Einstein, store as much memory as IBM's Big Blue, and exercise the willpower of Mahatma Gandhi. Really.” Real humans do indeed have cool, computationally gifted, far-sighted, and ethical minds, but these “econ” brains are constantly at war with their much older lizard brains, the “hot”, programmed-to-win, and action-oriented system that controls affect, that wants stuff, and wants it now.
Adam Smith called it "passion" and John Maynard Keynes called it "animal spirits". I might call it the struggle between reason and emotion. Admittedly economists makes a lot of assumptions when talking about human action, but as the article points out, that's mostly good:
Current mainstream economics has many defenders and it has many successes despite (or some would argue because of) ignoring the passions. Thinking of people as greedy calculators does pretty well in many situations. The idea that I know what is good for me (even if frequently wrong) seems like the right starting place, certainly compared with having other people decide what is good for me.
If citizens aren't always rational, certainly politicians aren't either. However, often governments and businesses manipulate choices just by forcing you to make one. Citing the popular economics book Nudge (blog here), the article suggests making the "best" choice easier:
The most important is the “Save more tomorrow” scheme, in which employees sign a contract that will automatically increase their saving rate next year, at which time no action needs to be taken. At the very least, this nudge shows how a clever understanding of human psychology can help design light-touch institutions that help people do what they want to do, with no limit on their freedom to choose.
I can appreciate frustration with my own decisions (remember my New Year's Resolutions). I can also appreciate small (emphasis on small) nudges for a passionate/spirited/emotional people. Economics ignores a lot of reality in order to find some truth. If we try to explain everything we end up explaining nothing. Economics has been expanding into other social sciences and now they are expanding back. As long as economics doesn't lose what has made it grow, perhaps this mix can help us learn more about ourselves.


  1. I think the more I have learned about psychology, the less interest and appreciation I have for economics. I still think economists are some of the most interesting academics, I just have much less respect for their discipline than I used to.

  2. I keep smiling at the probably unintended suggestion in the title of this post that economists aren't human.

  3. Justin W,

    That's interesting. I'm just starting Dan Ariely's Predictably Irrational where he combines the two sciences. I'll let you know what I conclude.

    Justin S,

    Are perhaps, economists are the only humans...

  4. @Justin : Don't you think that behavioural economics is more an mixture of economics & psychology ..... Moreover the basis of economics is the situations in which human beings behave rationally . I feel that there is lot of common area in both of the discipline.


You are the reason why I do not write privately. I would love to hear your thoughts, whether you agree or not.