By Dr Frank Shostak
According to a practitioner of behavioral economics (BE) Vernon Smith, individuals emotional state rather than reason is the driving factor in influencing their choices. On this, he wrote,
People like to believe that good decision making is a consequence of the use of reason, and that any influence that the emotions might have is antithetical to good decisions. What is not appreciated by Mises and others who similarly rely on the primacy of reason in the theory of choice is the constructive role that the emotions play in human action.
We suggest that without ascertaining by means of reason the facts of reality, individuals are going to have difficulties in establishing whether a particular fact is good or detrimental for their life and wellbeing.
By relying on emotions rather than reason in the making of choices, individuals run the risk of endangering their lives. According to Ayn Rand, emotions are not the valid means to ascertain the facts of reality.
An emotion as such tells you nothing about reality, beyond the fact that something makes you feel something. Without a ruthlessly honest commitment to introspection- to the conceptual identification of your inner states – you will not discover what you feel, what arouses the feeling, and whether your feeling is an appropriate response to the facts of reality, or a mistaken response, or a vicious illusion produced by years of self-deception…
By means of reason an individual can establish the suitability of a good to support life and wellbeing. Reason therefore is the individual’s means of survival. Again, according to BE, the key driver of individuals choices is emotions.
Now, according to BE, whether individuals are generally patient or impatient determines whether they are inclined to spend or save today.
Also, behavioral economists emphasize the importance of personality. An emphatic person is regarded more likely to make altruistic choices. Impulsive people are more likely to be impatient and not so good at saving up for their retirement. Venturesome people are more likely to take risks – they will be more likely to gamble.
Obviously once the importance of reason is dismissed, what is then left is treating human beings like objects. According to this way of thinking, human action is driven by outside factors that influence individuals. By means of a given stimulus, one could observe various individuals’ responses and draw all sorts of conclusions regarding the world of economics. However, Ludwig von Mises argued that
It is impossible to describe any human action if one does not refer to the meaning the actor sees in the stimulus as well as in the end his response is aiming at.
On this way of thinking causality emanates from human beings’ and not from outside factors.
Now, the BE framework was introduced in the field of economics because of dissatisfaction with the mainstream theory regarding consumer choices. In the mainstream theory individuals are presented as if a scale of preferences is hard-wired in their heads. The scale of preferences remains unchanged.
Contrary to the mainstream framework, Murray N. Rothbard held that valuations do not exist apart of the things to be valued. Whenever an individual is confronted with a good, he assesses it in accordance with it expected benefits to his life and well-being. These benefits are likely to vary given changes in individual’s circumstances. From this, it follows that an unchanged scale of preferences does not comply with the reality.
Obviously, human beings do change their minds, so it is not surprising that the BE practitioners have “discovered” that human being’s behavior systematically deviates from the one depicted by the mainstream economics.
Rather than dismissing the assumption of unchanged preferences, BE followers have retained this assumption and have only modified the mathematical formulation of consumer’s preferences labelled the utility function, in order to bring supposedly more realism to the mainstream model.
Since in the BE framework reason is not the key driver of individuals’ choices; individuals’ evaluations of goods are arbitrary i.e. not connected to the facts of reality. In the BE framework individuals make choices without referring to the purpose those goods are going to serve.
The Mises framework of consumer choices
Following the Mises’s framework of thinking, we can ascertain the distinguishing characteristic and the meaning of human action. For instance, one can observe that individuals are engaged in a variety of activities. Thus, they may be performing manual work, driving cars, or dining in restaurants. The distinguishing characteristic of these activities is that these activities are purposeful.
Furthermore, we can establish the meaning of these activities. Thus, manual work may be means for some people to earn money, which in turn enables them to achieve various goals like buying food or clothing.
Dining in a restaurant can be means for establishing business relationships. Driving a car may be means for reaching a particular destination. Individuals are acting within a framework of means – ends; they use means to secure ends.
To use means in order to reach an end implies that individuals have to do it consciously. Hence, we can also establish that human actions are not only purposeful but also conscious.
The BE economist Vernon Smith, rejects the view that human actions are conscious and purposeful.
Thus, he wrote,
He (Mises) wants to claim that human action is consciously purposeful. But this is not a necessary condition for his system. Markets are out there doing their thing whether or not the mainspring of human action involves self-aware deliberative choice. He vastly understates the operation of unconscious mental processes. Most of what we know we do not remember learning, nor is the learning process accessible to our conscious experience—the mind………Even important decision problems we face are processed by the brain below conscious accessibility.
Following the Mises’s framework anyone who objects that human action is conscious and purposeful contradicts himself. The objector consciously and purposefully argues that human actions are not conscious and purposeful.
Conscious purposeful action implies that individuals assess or evaluate various means at their disposal against various ends. Individuals’ ends set the standard for valuations and thus choices. By choosing a particular end, an individual also sets a standard of evaluating various means.
Thus, if my goal is to provide a good education for my child, then I will explore various educational institutions and will grade them in accordance with the information regarding the quality of education that these institutions are providing. Observe that the standard of grading these institutions is the end, which is to provide my child with a good education.
This way of thinking must be contrasted with the mainstream framework where individuals’ choices are determined by the preference scale. No reason is provided as to why the preference scale has selected a particular end versus another end.
Without ascertaining by means of reason the facts of reality, individuals are going to have difficulties establishing whether a particular fact is beneficial or detrimental to their life and wellbeing.
Conclusions
By casting doubt that reason is the main faculty that navigates human actions, behavioural economics emphasizes the importance of emotions. The practitioners of BE hold that individuals conduct is not rational. Consequently, the practitioners may have unintentionally laid the foundation for the introduction of government controls to “protect” individuals from their own irrational behaviour.
