Principles of Behavioral Economics for Personal Development 30 Giugno 2018 Rodica Ianole-Calin
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Tribunale Bologna 24.07.2007, n.7770 - ISSN 2239-7752 Direttore responsabile: Antonio Zama Principles of Behavioral Economics for Personal Development 30 Giugno 2018 Rodica Ianole-Calin Contributo selezionato da Filodiritto tra quelli pubblicati nei Proceedings “International Conference on Economics and Administration 2017” Per acquistare i Proceedings clicca qui: http://www.filodirittoeditore.com/index.php?route=product/product&path=78&product_id=143 Contribution selected by Filodiritto among those published in the Proceedings “International Conference on Economics and Administration 2017” To buy the Proceedings click here: http://www.filodirittoeditore.com/index.php?route=product/product&path=78&product_id=143 IANOLE-C?LIN Rodica [1], BRATU Anca [2] [1] Faculty of Business and Administration, University of Bucharest (ROMANIA) [2] Faculty of Business and Administration, University of Bucharest (ROMANIA) Emails: [email protected], [email protected] Abstract The paper aims to illustrate how becoming aware of our own behavioral patterns, by exposure to the experiments brought forward by behavioral economics, can trigger a significant transformation of our personal habits, in the direction of a better congruence with our true self and finally of better decision- making. The argumentation highlights three main focal points: the tensioned choice between maximizing and satisficing approaches, the inter-temporal conundrum between now and later, and the gap between planning and action. Introduction Understanding standard economic thinking – how a market works, how prices are formed, how economic agents interact – is without any doubt a first premise for achieving economic development. The following step, that of becoming acquainted with behavioral economic thinking, can further refine this development, but in a reverse order: creating initially a favorable space for personal development, that may gradually be led to wellbeing, also from a financial perspective. This change of paradigm is made possible, and accessible, nowadays by the re-humanization process of the economic agent. The novel interpretation is that of a common individual, with certain traits influencing her perception, mental representations about the environment and thus, economic decisions. While this “Humans versus Econs” position [1] seems very radical, the idea is far from being new. As it is the case with many concepts in Economics, Adam Smith [2] makes the original claim also in this case, building up a strong argument for the opposing roles of moral sentiments (as the human part) and the impartial spectator (as the econ part) in shaping economic behavior. Since the historical context of the time was much more in need for a theory explaining the wealth of nations and supporting economic growth, the main discourse eluded the human dimension and expanded the rational and objective features of economic agents. We continue to need economic development nowadays, but this need has a very different reference point, linked to a need for higher levels of subjective wellbeing that makes us more open and sensitive to comprehend the part that makes Adam Smith a behavioral economist [3]. The idea of using behavioral economics for personal development is actually much stronger than many other behavioral change theories given its emerging empirical grassroots: experimental proofs are showing again and again that irrationality and not economic rationality is the dominant characteristic at the level of population. The research methodologies are offering numerous hints and angles to identify the predictability of our irrational patterns (where irrationality is labeled by comparison to the technical definition of economic rationality: complete and transitive preferences, along with maximization of payoffs), but finally we have the liberty to choose if we really want to change our habits in the direction of the rational choice model or if we are actually content with them in this shape. The paper is built on exploring the dichotomies between the manner in which we perceive objectively, in cognitive terms, the popular concepts associated to economic success – maximization, living the presents and long-term planning – and the manner in which we feel them at an individual level, in terms of life satisfaction, knowing our own preferences and achieving our goals. Maximizer versus satisficer Maximization is one of the cornerstone concepts in most introductions to economics classes. Furthermore, going through the standard discourse of allocating resources and opportunity costs, maximization becomes intrinsically linked to rational behavior, from an economic perspective. Beyond the traditional argumentation, the principle is quite attractive for laymen: we are exposed to many choices in all areas of our life, which makes it very reasonable to attempt to decide based on maximizing benefits and minimizing costs. Is this situation one of those exceptional cases in which theory converges with reality and it actually teaches us something useful? The temptation to answer positively is undoubtedly high, but a closer look at how the maximization principle could be implemented reveals much more complications around the issue. First thing to consider is the listing of all possible options for a certain decision, options that also need to be evaluated in terms of the fuzzy concept of utility (for which we do not have to many concrete indications on how to build a valid measurement scale). Thus, what the implementation process recalls is an almost perfect knowledge of the external environment, doubled, at the time of the decision-making, by a good enough knowledge of our internal environment – our preferences. While all this may vary depending on the decision type, it is fair to say that it would normally involve an enormous cognitive load, both concerning the search and processing of information. Just to give an overview of the level of effort exercised for one day, the average number of daily conscious decisions is around 35.000. In this context, common sense and experience are sufficient to admit that this is way too much for applying a maximization algorithm as a default procedure. Of course, this is not a new though and Herbert Simon [4], [5], [6], has pioneered the logic of bounded rationality for more than a half of century, setting the scene for today’s behavioral economics ideas. Simon depicts the boundaries of rationality using the metaphor of a pair of scissors and the two blades that are necessary to make a cut or a decision: one blade is for the cognitive constraints, while the other is for the environment constraints. In this vein, he argues that maximization is not an inherent behavior and it is more intuitive to choose a solution that satisfies the requirement of a certain context . Reutskaja and Hogarth [7] expand this statement in an empirical manner and they show that choice satisfaction can be modeled as an inversely shaped U, dependent on the number of choice alternatives. A prominent and unconventional contribution to this discussion is also brought by Barry Schwartz [8] and his choice paradox theory. His hypothesis links maximization to the current dynamic of consumption society, which, through the multitude of choices, exacerbates our tendency to always prefer the optimum solution. He tests these assumption by developing two new instruments – a scale for evaluating the tendency towards maximization/satisficing and a scale for evaluation the tendency to experience regret [8]. The scales are correlated with other standard personality measures (neuroticism, perfectionism, optimism etc.) and the results point out the fact that the more rational consumers (those that are able to better identify opportunity costs and to follow more strictly the maximization principles) obtain indeed better financial outcomes, but they feel worst emotionally. They represent the category of maximizers and they seem to be less satisfied and happy about their life. This is happening due to the significant correlation between maximizing tendencies and the tendency to experience regret, a lower self-esteem, a higher probability to have depressive states and a lower level of optimism. A very interesting application of this conceptualization, at the border of personal and professional development, was done by Sheena Iyengar and her colleagues [9] to examine decision-making on the labor market: how much satisfaction do we get from searching for the best possible job? The study was made on students and graduates affiliated to career counseling centers from 11 universities. From measuring their maximization tendency, along with other traits, to finally observing their chosen jobs, the researchers have confirmed the initial theory: the starting wages for maximizers are indeed higher by 20%, on average, compared to the satisfiers’ wages. Despite that, maximizers declare to be less happy with this final result and the show more signs of pessimism, stress and anxiety during the entire process. In consequence, the American saying that “success is to get what you want” and “happiness is to want what you get”, contains much more behavioral economics wisdom than we have imagined. The advices, both personal and professional, go in the direction of being more aware about the emotional costs that appear in any decision-making process. Fortunately, these maximization tendencies do not manifest themselves in all our choice domains, which makes it feasible to gradually learn that choosing to be a satisfier