This year’s Nobel Prize in economics went to Richard Thaler for his work on behavioural economics, which borrows heavily from psychology or behavioural sciences.
It is a fact, not show off that we have used the term behavioural economics in a number of articles in this newspaper.
The first time was in October 2009 when we suggested that “cutting-edge research in economics is on the edge, bordering psychology, the so-called behavioural economics “
In March 2016, we suggested that “behavioural economics and finance are the new frontiers.”
Traditionally, economists have assumed in their models and analysis that we are rational, and make sensible decisions that further our interests to get maximum benefits.
But Thaler and others noted from experience and even experiments that we are not that rational. This is not so surprising; the key economic player is the human being with all their emotions. Thaler’s Prize proves this fact. There are enough examples of irrational behaviour around that support Prof Thaler.
Some are so irrational that they get rationality of their own.
Before we discuss the irrational behaviours, let us find out who is Richard Thaler. He is a 72-year-old American based at University of Chicago’s Booth School of Business. Others scholars who did similar work and won Economics Nobel Prizes include Gary Becker, Herbert Simon, Daniel Kahneman and George Akerlof.
Thaler’s analysis looks counter-intuitive, for example, suggesting that instead of using facts on evils of obesity, you are better off informing an obese person how many his friends have lost weight to goad them to join a gym.
We use Thaler’s ideas all the time. For instance, to entice people to come for a seminar, inform them on who has already paid. Interestingly, harambees through WhatsApp groups list contributors to nudge potential contributors to donate.
More evidence of irrational behaviour around us? We start with shopping. Though you might have spent hours planning on what to buy, it is unlikely that is what you will buy.
Once in the market, adverts or meeting other people change your mind. That is why milk and bread are placed furthest from the tills to ensure that you have enough time to revise your rational behaviour and buy what you never planned to buy.
Ladies tell me that once in the saloon, they are likely to choose a style depending on what their stylist recommendation or styles available. That applies to fashions and jewellery. What of marriage? Falling in love is about emotions and very little rationality. I’m told if you can explain why you married your wife, divorce is not far away. What of gachungwas (mistresses)? Why do men pursue gachungwas when they know the economic and social costs?
Rational, well educated men are more likely to have gachungwas.
The question then would be: Does education make us more rational? How about witchcraft? Why do some people still believe in it despite subscribing to Christianity and other religions? If we knew exactly what witchcraft is all about, perhaps fewer people would be swayed by it.
First class ticket
Witchcraft’s mystery and irrationality have ensured its longevity. The success of witches and their cousins the witchdoctors very much depends on their realisation that we are not rational. You are free to add other examples on irrationality from your own experience.
Interestingly, further analysis of irrationality yields rationality, which makes behavioural economics such an interesting area.
Take an extreme example: Why pay double for a first class ticket on a plane or train when you arrive at the same time with someone on economy class?
Is it true that passengers in public service vehicles in Dundori, near Nakuru fight to sit next to the driver to arrive earlier? Anyone from Dundori reading this can talk to me …
Paying more might appear irrational, but most first class ticket takers do not pay from their pockets. They are sponsored by their companies. How about gambling when facts indicate you are more likely to be hit by lightning than winning a jackpot. Irrationality goes beyond personal decisions; it is in national decisions espoused by politics. Perhaps it’s in politics where irrationality has found a home.
Think of the irrationality behind voting your MCA, your MP or even president? No wonder you get fed up with them as soon as they are sworn in. Politicians know we are not rational and keep making irrational promises. It is no wonder we follow them so faithfully. Another example of irrationality is religious cults. Or how rational are we as a country in dealing with the current political impasse?
But let us be rational for once; irrationality drives the economy. If we were too rational, the economy would grind to a halt.
If we are too rational, we would rarely buy or sell, leading to business closures. Does behavioural economics explain why it’s so hard to avoid economic recessions? In developed countries, consumerism drives the economy as citizens buy new gadgets and services without too much analysis. In my many travels, I’m amazed by that culture of throwing away “new things” like furniture, shoes and clothes that end up in developing countries.
This irrationality creates new jobs, transforming into rationality. At the same time, if we were too rational, we would not marry and procreate the next generation of consumers. Behavioural economics brings economics closer to reality, away from esoteric equations and graphs. If we study this area, we would explain the paradoxes in economic decisions and why economic growth is so elusive in most countries.
With Thaler’s Nobel Prize, it seems the golden age of behavioural economics is just beginning.
The writer teaches at the university of Nairobi