The renowned Behavioural Economist talks about some of the hidden forces that shape our decisions
You have called Alan Greenspan’s admission to being ‘shocked’ by the failure of the financial system “an important step forward” for Behavioural Economics. Please explain.
For years, my colleagues and I have been conducting experiments about human irrationality. When we present our results, the ‘rational’ economists say, ‘These are very nice experiments that make for great dinner conversation; but when it comes to professionals making decisions that involve money, irrationality simply doesn’t occur’. I never bought this argument: why would the human brain develop two different approaches to decisions that depend upon the importance of the decision? While I allowed that the market could possibly mitigate some irrational behaviour, I also felt that it could increase it.
By the way, conflict of interest was a major contributor to the financial crisis. Imagine if I paid you ten million dollars a year to believe that mortgage-backed securities are a good thing, and I got everybody around you to behave in the same way. The desire to see the world in a way that is comfortable for us is very powerful, and I don’t think we can escape it. What we can do, is to try to limit the amount of trouble it gets us into by taking steps to eliminate conflict of interest from our financial system, from our healthcare system and from politics. However, the sad truth is that once people are tempted with a conflict of interest, they are likely to fail, and this brings me to another point: many people think Behavioural Economics is just about ‘how stupid we are’, but it’s also about how wonderful we are. If you are a lobbyist for company X, and you come and spend time with me and tell me stories, and I learn about your family and your hobbies and so on, I am predisposed to like you, and I will want to help you. It is this basic human desire to help others that makes me susceptible to you. This is a wonderful capacity -- it’s great that we like other people and are willing to do all sorts of things for them. As we’ve discussed, conflict of interest also has a very dark side, but I would not want to program people so that they aren’t susceptible to it; while it would eliminate many decision errors, it would also mean people wouldn’t care about each other. I think we just need to better understand human nature, figure out its strengths and weaknesses, and find ways to limit the costs of the weaknesses.
[This article has been reprinted, with permission, from Rotman Management, the magazine of the University of Toronto's Rotman School of Management]