Social Education 83(2), p. 94–99 ©2019 National Council for the Social Studies Making Economics Cool Econs vs. Humans: An Introduction to Behavioral Economics M. Scott Niederjohn and Kim Holder Can teachers promote true economic understanding among students by adding a economics, however, takes investigation dose of psychology? Fans of behavioral economics, with its unique blend of psychol- into human nature further and focuses ogy and economics, think so. Blending a bit of behavioral economics into social on areas in which they are particularly studies lessons provides answers to the ever-present questions that permeate every challenged in making good decisions. classroom,“What does this have to do with me?” and “When will I ever use this?” The results of these experiments have Teachers can help students understand behavior in the world that surrounds us by led to a number of real-world insights moving them from a rote understanding of economic theory to a richer approach that into public policy, business, education, brings in elements of psychology. healthcare and many other aspects of life. Students exposed to behavioral eco- are credited with originating behavioral Econs vs. Humans nomics find it appealing because it economics with human behavior stud- One simple way to think about behav- allows them to go beyond traditional ies in the 1960s.2 Their work over the ioral economics is to consider how actual economic models. In the traditional eco- next 30 years helped lead to a field that people differ from those modeled in a nomic approach, frequently referred to has directly or indirectly produced six standard economics textbook. One as rational choice theory, basic assump- recent Nobel Prizes in economic science, might argue that the field of econom- tions about human behavior are used to including the 2002 prize to Kahneman ics looks at people as “econs”—that is, simplify the model of how an economy and the 2017 award to Richard Thaler, they assume we carefully weigh costs and works. In contrast, behavioral economics the author of the popular book Nudge.3 benefits of alternatives before making uses assumptions that are more closely In his Nobel Laureate address Thaler decisions. Econs, therefore, could be aligned with how people actually behave. stated, “In order to do good economics, described as being analytical, reflective, The authenticity of behavioral eco- you have to keep in mind that people are effortful, deliberate and patient. To be nomics resonates well with the current human.” This quotation helps explain fully rational, an econ would also need generation and helps students see how the insights that can be gleaned from this to be well-versed in probability theory economic analysis, augmented with psy- field of economic study. and rational optimization. Thus an econ chological insights, can provide genuine Frequently relying on experiments, would always make the best choice given solutions to real world problems. behavioral economics points out that a set of alternatives. Does this sound like humans are not always perfectly ratio- most people you know or interact with? What is Behavioral Economics? nal decision makers. While the field of Behavioral economists don’t think so The field of economics traces its roots to economics has always understood this either. They instead think of humans as Adam Smith’s seminal work from 1776, fact, the discipline does rest on the using costs and benefits, but also being An Inquiry into the Nature and Causes idea that people can accurately weigh influenced by other factors when mak- of the Wealth of Nations.1 In contrast, costs and benefits to make decisions ing decisions. Humans might sometimes the field of behavioral economics dates that maximize their own welfare.4 Even be described as emotional, reflexive, back only about 50 years. In Michael if people make mistakes in the process, effortless, impulsive, and short-sighted. Lewis’ 2017 book, The Undoing economists point out that models based If behavioral economists are right, they Project, Israeli-born psychologists on rationality have nonetheless yielded can improve on the predictive ability of Daniel Kahneman and Amos Tversky accurate and useful results.5 Behavioral the models based on standard economic Social Education 94 assumptions. Therefore, behavioral the experimenter. Again, this seems irra- the print subscription alone; 84 percent economists have focused on areas that tional as the monkeys had been perfectly opted for the combination deal and 16 humans find especially difficult when happy with cucumbers, but now they are percent picked the web subscription. trying to make good decisions. overcome by a sense of unfairness when However, then Ariely repeated the poll their neighbor gets a better reward. Even without offering the unpopular print- Cognitive Biases: Common a monkey will punish itself—throw away only alternative. After all, nobody was Mistakes Humans Make food it likes—to make its point. choosing it, so what difference could it Imagine the following activity—referred make to leave it out? In this second time to as The Ultimatum Game—taking place Anchoring Effect around, 32 percent wanted the print in your classroom.6 In this activity, half A preference for fairness can push people of the students in the class are assigned away from completely rational choices to be “proposers” and the other half are based on self-interest. Another such cog- assigned as “responders.” Each proposer nitive bias is the anchoring effect, some- has to decide how to split $100 with a times referred to as the “framing effect.” randomly assigned responder. The pro- With anchoring effects in play, people’s poser may offer an even split or any other decision-making is influenced heavily by combination. But if the responder rejects the first piece of information offered or the offer, both the proposer and their the most familiar piece of information. responder get nothing. Thaler and Sunstein provide an example This game has been replicated by of Chicago residents who were asked to many researchers using diverse samples guess the size of Milwaukee, Wisconsin.9 of people, and the results tend to be Because their subconscious anchor is the Visual 1 consistent.7 The most common offer is city they know well, Chicago, they will a 50/50 split and both parties get $50. tend to guess too high—guessing about A more aggressive proposer might say one-third the size of Chicago, or about to a responder, “I get $60 and you get 1 million residents. People from Green $40.” About 20 percent of such low Bay, Wisconsin, do the same thing, but offers to the responders (offers of less use what they know, Green Bay, as their than a 50/50 split) are rejected. These anchor. They are likely to guess about rejections are surprising to rational three times bigger than their hometown choice economists. Why? The answer or about 300,000 inhabitants. It turns is that rejecting $40, or any offer above out the correct answer is between the zero, seems irrational. The responders two; about 580,000 people reside in Visual 2 are essentially choosing to punish them- Milwaukee. selves by not taking free money. Why Well-known behavioral economist subscription, while 68 percent preferred would they do this? The conclusion of Dan Ariely shows an anchoring effect to go web-only. It appears that the pres- most researchers is that people seem to in pricing using The Economist maga- ence of the clearly inferior option altered care about fairness, even when it may not zine in his book Predictably Irrational.10 the decision process by making the com- be strictly rational. Examine Visual 1, above right. You can bined web and print subscription seem Interestingly, this same sense of fair- get access to all of the web content for like a better deal. Print only became ness seems to also exist among animals. $59, a subscription to the print edition an anchor as the most familiar piece of Experiments have been done with capu- for $125, or a combined print and web pricing available and people concluded chin monkeys, as well as with other ani- subscription which is also priced at $125. they might as well buy the combination mals, in which they are asked to do a Intuitively, the offer of the print-alone of print and web access because it was simple task in exchange for a piece of option seems absurd. Nobody would such a great deal. Even so, this anchoring food.8 Monkeys that are in cages next to rationally choose to forgo web access effect drove consumers toward choosing each other will do the task over and over when it costs nothing extra, so why even the much more expensive option. again for the reward of a piece of cucum- list it? Why not just say that the print ber. However, if one of the monkeys subscription also includes access to the Loss Aversion gets a grape (which monkeys prefer to web archives? In the book and movie Moneyball, cucumbers) for the task, the animal that Visual 2 helps to demonstrate the Oakland A’s General Manager Billy continues to get a cucumber will revolt answer. Predictably, when all three Beane stated, “I hate losing more than and actually throw the cucumber back at options were available, nobody chose I even wanna win.”11 While he may not March / April 2019 95 can be a difficult problem for humans the potential loss is emphasized as to overcome; however, recognizing how it often is in retail advertising that Loss aversion is it can affect decision-making may help focuses on trigger words like “last people avoid situations where it can chance” or “Don’t miss out! Act the notion that be a detriment.