Let me get you into Behavioral Economics (BE).
With a preamble about a jewel that I found this summer at my parent’s home. Among my high school and University papers was an article that I had kept of Kahneman and Tverski in 1986!
These two people are recognized in the world as precursors of what is now BE. Kahneman, a psychologist, won the Nobel Prize in Economics in 2002 and Tverski, sadly, died of cancer in 1996. Kahneman and Tverski, two experimental psychologists, along with Richard Thaler, an economist, who has directly collaborated with them, have developed a group of great ideas for us during recent decades.
Econ´s vs Human´s
The idea “econs vs. humans” is an easy way to understand our decision-making behavior . This is the difference between:
- ECON, rational behavior, logic, we used to using logic … To do so we use our wills, we make a mental effort. We are economic. But does this happen really well? Do we always do it? This is the classical theory of economics.
- HUMAN´s, are not always logical, they have intuition, react automatically, have emotions to decide and can commit errors, from a rational point of view.
But these errors are consistent, are biases, they can be studied and systematized. Therefore they can be managed. A cognitive bias is a psychological effect that produces a deviation in processing reality. That is, people believe their own subjective reality through their perception and this subjective really guides their behavior. Therefore, we use available information in our decision-making and cognitive biases create a distortion, inaccurate judgments and illogical interpretations, it deviates from rationality.
Kahneman tells us that there are two systems, two ways of thinking and making decisions.
- System 1: Quickly and automatic, almost effortless, almost without voluntary control. This system demonstrates innate skills, shared with animals. We are born prepared to perceive the world around us, to recognize objects, to direct care, to prevent losses. Our mental activities become fast, automatic with practice. Examples: Perceiving what we hear from afar and guiding us to the source of sound, detecting hostility in a voice, reading the words of advertising, driving a car on an empty road, understanding simple sentences.
- System 2: Focused on mental activities. This system chooses and is concentrated, demanding experiences to act. We believe that it is defining us, is self-conscious, rational, with beliefs. It decides what to think and what to do. Examples: To listen to the voice of a specific person in a crowd, to look for a woman with white hair, to search in our memory for a noise, walking faster than normal, to maintain appropriate behavior in a social situation, to know how many times a letter appears in a text, to park in a narrow space, to compare two washing machines in order to choose the best, to verify the validity of a complex logical argument, to do an income tax declaration…
The expression “pay attention” is very successful, we have a limited budget and we can assign certain activities and if we go over our budget it fails.
Daniel Kahneman, how the two systems work together?
- The two systems are always active. System one acts automatically and System two is usually in a comfortable minimum mode.
- System one makes continuous suggestions to System two. Impressions, insights, feelings …
- System two acts if a problem arises with system one. System two is activated when attending an event that alters the automatic world, there is a surprise and so it is activated and directs our attention. We look straight at it and we search for a memory, a story that explains what is happening.
- System two is able to continuously control our behavior. The labor division between the two systems is enough to minimize the effort and optimizes the execution..
The law of “minimum effort”
In coordination of System one with System two there is the law of minimum effort, if there are several ways to achieve the same goal, the final decision is the least demanding. The effort is a cost and the balance between cost-benefit is important.
- Laziness is deeply rooted in our nature.
- To frequently change tasks, multitasking, and mental work expedited are not inherently pleasurable and people avoid them as much as possible.
- Self-control requires attention and effort. To control thoughts and behavior is one of the tasks that runs System two.
- Many people find the cognitive effort unpleasant and avoid it if they can.
In conclusion, preventing intellectual laziness could make people diligent. We are more alert, the intellect is more active, we are less willing to stay satisfied with superficial responses, we are skeptical about their own intuition, we are more rational.