Sunday, May 17, 2015

Are Homo Sapiens Really Wise Men? ... Why Smart People Do Dumb Things

Homo sapiens are supposed to be wise. In fact, Homo sapiens is Latin for 'wise men.'

Wise men are supposed to think things through and make rational judgments when deciding which course of action to take.

In the law, the objective or 'reasonable man' test is extensively used to assess behaviors and decide cases and controversies. The theoretical reasonable man standard is invoked to compare an individual's behavior to what a reasonable or rational person should do when faced with the same or similar facts and circumstances.

And interpersonally most of our subjective judgments about the behavior of others are based on this objective test. The only problem with all this reasonable stuff is it's not the way we're wired. The plain fact is that we 'Homo sapiens' frequently don't act rationally, let alone wisely. Put another way, common sense isn't very commonly used.

So whether it's the marshmallow test of accepting a less valuable immediate reward instead of choosing to wait for a much larger, albeit deferred, gratification (see Keenan's recent May 15 post titled 'Shoes and Stocks ....' or mine of February 25, 2012 titled 'Current vs. Delayed Consumption ....'), doing poorly in school vs. studying and making good grades, excessively borrowing for student loans or credit cards, poor physical exercise habits, prematurely buying that expensive car or new house in lieu of developing a habit of saving and investing, taking unaffordable trips or vacations, or any other number of regular occurrences which violate common sense 'reasonable man' standards, we highly flawed Homo sapiens frequently and habitually tend not to do the wise, reasonable or rational thing.

That said, we can train ourselves to study hard, show up and act right, not unduly penalize tomorrow's benefits for the pleasures of today, and many other things which would result in better self treatment as we go through life. We just have to make a conscious and concerted long term effort to overcome our human tendency to act emotionally instead of rationally.

It's not easy, but it is simple, and it definitely can and should be done.

How Homo Economicus Went Extinct should be required reading for all Americans. Its subtitle is 'Consumers and investors don't act rationally, but for generations economists have acted as if they do:'

"I have long been amused by economists and their curiously delusional notion of the “rational man.” Rational? Where do these folks live? Even 50 years ago, experimental studies were demonstrating that people stay with clearly wrong decisions rather than change them, throw good money after bad, justify failed predictions rather than admit they were wrong, and resist, distort or actively reject information that disputes their beliefs. In recent years, a new field has emerged—“behavioral economics”—to propose an alternative to the rational man of traditional economics. . . .

As the offspring of traditional economics and experimental social psychology, behavioral economics shows remarkable hybrid vigor, and Richard Thaler, one of the new field’s founders, acknowledges its debt to psychological science throughout his highly enjoyable intellectual autobiography, “Misbehaving.”. . . Humans do a lot of misbehaving” — thus the book’s title.

The problem, Mr. Thaler argues, is that although economists “hold a virtual monopoly” on giving policy advice, the very premises on which that advice rests are deeply flawed. . . . Mr. Thaler calls for an “enriched approach" . . . .

The book’s organization is both chronological . . . and topical, devoting long sections to findings from four areas of particular interest to him. These are “mental accounting” (with chapters on bargains and sales, sunk costs, budgets and gambling), self-control (the difference between people who plan and people who impulsively act), finance (including the irrationality of people’s behavior in the stock market), and fairness games (why people often prefer fairness to self-interest). In a two-person game in which one person must allocate, say, $50, most recipients would prefer to walk away with nothing than accept an offer they consider “unfair” (such as $5).

Dense with fascinating examples, each of Mr. Thaler’s topical areas tells, in a way, the same story: Traditional economics predicted X; evidence failed to confirm X and indeed often contradicted X; establishment explained away the evidence as an anomaly or miscalculation. . . .

One article directly attacked the . . . notion that people make good choices, and certainly better choices than anyone else could make for them.” By empirically demonstrating that consumers often do precisely the opposite, because rationality and self-control are bounded by human perceptual distortions, their paper undercut this principle. . . .

Accordingly, the final chapters of “Misbehaving” take on the key issue of nudging: “Could we use behavioral economics to make the world a better place? . . . Yes, he argues . . . . Because people make predictable errors, we can create policies and rules that lower the error rate, whether it has to do with reducing driving accidents, getting men who use public urinals to aim better or enticing people to save for retirement—and do it in a way that makes people themselves happier with the results."

Summing Up

We're all smart people, but we're all prone to do dumb things from time to time. 

In hindsight we come to recognize and accept that much of what we've done during our lifetimes consisted of things we would have been better off not doing.

And then we often wondered, if only to ourselves, why we had let ourselves do those dumb things --- but by then it was too late to do anything about it.

What we didn't do before acting in haste is take the time to think things through, make thoughtful decisions, and then proceed to act rationally. We didn't resist the ever present urge to act emotionally, and we paid the price for so doing. Often it was a needlessly high price to pay.

We should explicitly acknowledge this universal human tendency and commit to rewire our behaviors and strive ever harder to do the right things.

It won't be easy, but it can and should be done. At least the effort should be made, and the self awareness should be acknowledged.

That's my take.

Thanks. Bob.

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