Principles of Behavioral Economics for Personal Development

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Contribution selected by Filodiritto among those published in the Proceedings “International Conference on Economics and Administration 2017”

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IANOLE-CĂLIN Rodica [1], BRATU Anca [2]

[1] Faculty of Business and Administration, University of Bucharest (ROMANIA)

[2] Faculty of Business and Administration, University of Bucharest (ROMANIA)

Emails: rodica.ianole@faa.unibuc.ro, anca.bratu@faa.unibuc.ro

 

Abstract 

The paper aims to illustrate how becoming aware of our own behavioral patterns, by exposure to the experiments brought forward by behavioral economics, can trigger a significant transformation of our personal habits, in the direction of a better congruence with our true self and finally of better decision-making. The argumentation highlights three main focal points: the tensioned choice between maximizing and satisficing approaches, the inter-temporal conundrum between now and later, and the gap between planning and action.

 

Introduction 

Understanding standard economic thinking – how a market works, how prices are formed, how economic agents interact – is without any doubt a first premise for achieving economic development. The following step, that of becoming acquainted with behavioral economic thinking, can further refine this development, but in a reverse order: creating initially a favorable space for personal development, that may gradually be led to wellbeing, also from a financial perspective. This change of paradigm is made possible, and accessible, nowadays by the re-humanization process of the economic agent. The novel interpretation is that of a common individual, with certain traits influencing her perception, mental representations about the environment and thus, economic decisions. While this “Humans versus Econs” position [1] seems very radical, the idea is far from being new. As it is the case with many concepts in Economics, Adam Smith [2] makes the original claim also in this case, building up a strong argument for the opposing roles of moral sentiments (as the human part) and the impartial spectator (as the econ part) in shaping economic behavior. Since the historical context of the time was much more in need for a theory explaining the wealth of nations and supporting economic growth, the main discourse eluded the human dimension and expanded the rational and objective features of economic agents. We continue to need economic development nowadays, but this need has a very different reference point, linked to a need for higher levels of subjective wellbeing that makes us more open and sensitive to comprehend the part that makes Adam Smith a behavioral economist [3].

The idea of using behavioral economics for personal development is actually much stronger than many other behavioral change theories given its emerging empirical grassroots: experimental proofs are showing again and again that irrationality and not economic rationality is the dominant characteristic at the level of population. The research methodologies are offering numerous hints and angles to identify the predictability of our irrational patterns (where irrationality is labeled by comparison to the technical definition of economic rationality: complete and transitive preferences, along with maximization of payoffs), but finally we have the liberty to choose if we really want to change our habits in the direction of the rational choice model or if we are actually content with them in this shape.

The paper is built on exploring the dichotomies between the manner in which we perceive objectively, in cognitive terms, the popular concepts associated to economic success – maximization, living the presents and long-term planning – and the manner in which we feel them at an individual level, in terms of life satisfaction, knowing our own preferences and achieving our goals.

Maximizer versus satisficer 

Maximization is one of the cornerstone concepts in most introductions to economics classes. Furthermore, going through the standard discourse of allocating resources and opportunity costs,

maximization becomes intrinsically linked to rational behavior, from an economic perspective. Beyond the traditional argumentation, the principle is quite attractive for laymen: we are exposed to many choices in all areas of our life, which makes it very reasonable to attempt to decide based on maximizing benefits and minimizing costs. Is this situation one of those exceptional cases in which theory converges with reality and it actually teaches us something useful? The temptation to answer positively is undoubtedly high, but a closer look at how the maximization principle could be implemented reveals much more complications around the issue.

First thing to consider is the listing of all possible options for a certain decision, options that also need to be evaluated in terms of the fuzzy concept of utility (for which we do not have to many concrete indications on how to build a valid measurement scale). Thus, what the implementation process recalls is an almost perfect knowledge of the external environment, doubled, at the time of the decision-making, by a good enough knowledge of our internal environment – our preferences. While all this may vary depending on the decision type, it is fair to say that it would normally involve an enormous cognitive load, both concerning the search and processing of information. Just to give an overview of the level of effort exercised for one day, the average number of daily conscious decisions is around 35.000. In this context, common sense and experience are sufficient to admit that this is way too much for applying a maximization algorithm as a default procedure. Of course, this is not a new though and Herbert Simon [4], [5], [6], has pioneered the logic of bounded rationality for more than a half of century, setting the scene for today’s behavioral economics ideas. Simon depicts the boundaries of rationality using the metaphor of a pair of scissors and the two blades that are necessary to make a cut or a decision: one blade is for the cognitive constraints, while the other is for the environment constraints. In this vein, he argues that maximization is not an inherent behavior and it is more intuitive to choose a solution that satisfies the requirement of a certain context.

Reutskaja and Hogarth [7] expand this statement in an empirical manner and they show that choice satisfaction can be modeled as an inversely shaped U, dependent on the number of choice alternatives. A prominent and unconventional contribution to this discussion is also brought by Barry Schwartz [8] and his choice paradox theory. His hypothesis links maximization to the current dynamic of consumption society, which, through the multitude of choices, exacerbates our tendency to always prefer the optimum solution. He tests these assumption by developing two new instruments – a scale for evaluating the tendency towards maximization/satisficing and a scale for evaluation the tendency to experience regret [8]. The scales are correlated with other standard personality measures (neuroticism, perfectionism, optimism etc.) and the results point out the fact that the more rational consumers (those that are able to better identify opportunity costs and to follow more strictly the maximization principles) obtain indeed better financial outcomes, but they feel worst emotionally. They represent the category of maximizers and they seem to be less satisfied and happy about their life.

This is happening due to the significant correlation between maximizing tendencies and the tendency to experience regret, a lower self-esteem, a higher probability to have depressive states and a lower level of optimism.

A very interesting application of this conceptualization, at the border of personal and professional development, was done by Sheena Iyengar and her colleagues [9] to examine decision-making on the labor market: how much satisfaction do we get from searching for the best possible job? The study was made on students and graduates affiliated to career counseling centers from 11 universities. From measuring their maximization tendency, along with other traits, to finally observing their chosen jobs, the researchers have confirmed the initial theory: the starting wages for maximizers are indeed higher by 20%, on average, compared to the satisfiers’ wages. Despite that, maximizers declare to be less happy with this final result and the show more signs of pessimism, stress and anxiety during the entire process.

In consequence, the American saying that “success is to get what you want” and “happiness is to want what you get”, contains much more behavioral economics wisdom than we have imagined. The advices, both personal and professional, go in the direction of being more aware about the emotional costs that appear in any decision-making process. Fortunately, these maximization tendencies do not manifest themselves in all our choice domains, which makes it feasible to gradually learn that choosing to be a satisfier is not the equivalent of settling for less in life, but it may well be just a sign of adaption and a first step in enjoying your decisions.

 

Now versus later

Procrastination is recognized as a major issue on a large scale but mostly at a personal level, with small echoes in what concerns its economic implications. This indifference is often justified on the basis that what we postpone are not necessarily important aspects. Because if they would be important, thus if they would have a high utility value for us, then we would clearly behave rationally and stop procrastinating. A strong logic indeed, but only at a theoretical level. When faced with the actions involved in such a decision, the present moment takes over the elaborated consequences placed in the future and we end up so many times procrastinating. Hal Hersh field and his colleagues describe this pendulation as the battle between the present and the future self. The present self- fights for obtaining immediate gratification, while the future self only obtains gratification if the individual gives up the immediate satisfaction for building up a behavior or an outcome visible in the future.

Behavioral economists place these preoccupations into the framework of intertemporal choice and time preferences. Within this stream of research, we distinguish two categories: decisions characterized by immediate costs, experienced in the present, and delayed benefits (this applies to almost all types of investments: in education, for retirement etc.) and decisions characterized by immediate benefits and delayed costs (this applies to many temptations, from smoking to overeating). The solution for minimizing this present-future tension, beyond the discount rates used in economic modeling, is expressed through self-control, as the capacity to control our impulses that helped us to become completely human [11]. Among the many strategies proposed for understanding and developing self-control, the story of Ulysses going back home is probably one of the most widespread. His choice of tying himself to the mast in order to resist the temptation of the sirens has become iconic for what is nowadays defined as a commitment device. Naturally, the first step in implementing such a device consists in accepting that we have an imperfect level of self-control in what concerns our own behavior.

The second part is equally different since we need to create a structure able to oblige ourselves to stay on the correct track, before we are actually faced with the temptation. From these general guidelines, commitment devices can have different manifestations, from signing contracts to advance payments or assuming responsibility in public (the commitment comes through social pressure). Some strategies can be more mechanic, as in a stimulus-response relationship, while others can open the path for learning and thus for sustainable approach on the long-term. This is the philosophy behind the willpower muscle analogy [12] a too intense effort in a short period of time can lead to exhaustion (under the label “ego depletion”), but a constant practice on a longer period can definitely increase performance and decision quality.

The famous marshmallow test started in the ’60 by Walter Mischel [13] has become a classic for illustrating the major impact of the capacity to delay gratification for the entire lifespan of an individual, specifically in school performance (score tests, planning, focusing, coping with stress) and life performance in general (maintaining relations, career development, financial stability etc.).

The results obtained in numerous experimental replications point out the crucial importance of focusing attention in the right direction: children failed the test almost every time when they focused on the temptation, while success appeared when they have ignored the temptation and adjusted their attention to something else. Other consequent studies have refined this technique [13]: for example, in one such study the participants were instructed to imagine that the marshmallow is framed and it is actually a painting and not a real object. The degree of resistance, thus the time of waiting, has increased over three times for the subjects experiencing this type of treatment, suggesting that the success of the technique is due to the proper distance from the temptation. An alternative explanation for this position is given also by the so called emphatic distance that leads to wrong predictions, with respect to preferences or behaviors, when the moment of making the prediction and the predicted experience are placed in completely different affective states. George Loewenstein [14] discusses two such cases: emphatic distance from hot to cold and emphatic distance from cold to hot. The first couple hot – cold characterizes the marshmallow test and the recommended strategy talks about entering into a cold state, by distancing from the temptation and increasing the probability of making a decision having a stronger self-control sense.

Generally speaking, when we are in a “hot” state, the most encountered tendency is to underestimate the degree in which our emotions affect our decisions: we simply believe that we are much more objective than what reality shows. At the other end, the choices made under a “cold” state (the equivalent of a high degree of self-control) are equally dangerous in respect to the accuracy of the predictions made for the future: if we are not in a constraining situation (biologically or psychologically) but the decision made refers to a time horizon that may be pressing in such a way, we are again quite faulty in correctly estimating our behavior.

The approach that highlights the importance of migrating from a hot to a cold state when we are on the verge of an important decision, opens up new perspectives on how to deal with imperfect self- control, bringing into play habits, general rules and pre-determined patterns. The psychologist Howard Rachlin [15] argues that in the cases when the limits of our self-control are tested, the strongest opposition can be implemented through routines and habits.

Their nature is exactly that of avoiding decision-making by analyzing specific cases (usually associated with different temptations) and of keeping in place choices previously made, in the virtue of abstract but familiar rules. More than that, Rachlin believes that this point of view is arbitrarily different than the image of self-control as an internal battle and he supports this position by looking more at some structural problems generated by self-control (alcoholism, smoking, gambling) and less on minor issues (still considered important but without entering the addiction category). The solutions proposed mostly speak about changing the variability in time of the problematic behavior.

His studies have shown that imposing a very clear and strict habit for an action characterized by the lack of self-control is useful in the sense that problem will become weaker in time. The standard example refers to reducing the number of daily cigarettes: the habit implemented was to smoke the exact same number of cigarettes each day (the number depending on the smoker wish). The results are consistent every time: people start smoking less, even if they are very clearly instructed that they should not make an effort to do that. The explanation is that such strict rules have the capability of shattering the illusion that tomorrow things will be different and better. Instead, following the rule induces a peculiar state of awareness on negative effects of smoking, in the sense that each cigarette smoked today is actually a cigarette that will be smoked tomorrow, and after tomorrow and so on.

Fortunately, as it was the case of maximizing tendencies, self-control problems are not present in all areas of our life and the choice of the most appropriate strategy of managing them (not to say solving them completely) depends a lot on the particular context in which we observe them.

  

Planning versus acting  

Planning is a best friend of procrastination. On the one hand, planning is clearly part of the solution, in the sense that if we have a plan, then our chance of acting in time is definitely increasing (a very rational perspective). On the other hand, planning may amplify the presence of procrastination on a long term if we are exposed to the planning fallacy. Kahneman and Tversky are even calling this bias a sophistic error and they defined it as generating those plans and predictions that are unrealistically close to the best-case scenario, and they could be clearly improved by looking up statistics from similar cases [16]. In other words, the tension that appears this time in our decisional processes comes from heightening the internal perspective on a situation and respectively from neglecting the insights offered by external perspectives, technically called reference class forecasting [17].

What usually happens is a process of underestimating costs, time and associated risks of some desired actions, which is simply the other face of overestimating the potential benefits.

From big delays in finishing infrastructure projects, to smaller, but nonetheless significant, delays encountered in our daily life, the planning fallacy seems to be indissolubly connected to overconfidence and an optimism bias. There are multiple forms of overconfidence, among which we are mostly concerned in this particular case with the overestimation of our own abilities, performance, self-control or success chances (the other two forms speak either about a better than the average effect – we all think we are better than the rest, or about over precision – an excessive certainty with respect to the accuracy of our own beliefs).

Classical instances of documenting overconfidence go from naïf subjects – overestimations made by students regarding their performance to an exam [18] to sophisticated ones – overestimations made by doctors regarding the accuracy of their diagnostics [19].

If we scrutinize the overconfidence matter in an isolate way, we tend to look at it with a lot of compassion: how else could we be innovative, could we create new paradigm or could we take risks without this protecting shield against all the realistic elements that could block our initiatives? It is clearly a strong argument for the positive implications of overconfidence and it is hard to dismiss it at an individual or collective level. The good side is that even if we would wish that, we actually cannot get rid of this bias since it is deeply rooted in our brain, being linked to an increase activation of the amygdala and the anterior Cingular cortex [20].

The less appealing side is that the planning errors can be extremely costly for managing different types of resources – money, time, energy and effort. Becoming more aware of them can be translated into a re-design of our incentive schemes, to amplify the good part and to minimize the bad one.

Reflecting upon planning emphasizes another aspect usually ignored by standard economics: we can obtain utility not only by consuming a good or a service, but also from the waiting period before the actual consumption act. In other word, planning has the capacity to generate anticipatory utility [21], thus offering a good justification, in some context, to a bit of procrastination. For example, the answers to the question posed in an experimental study “How much would you pay to obtain a kiss from your favorite movie star?” [21] are a suggestive proof for this type of utility: the surveyed students are willing to pay significantly more for the option in which they would receive the kiss in three days, compared to the options of getting it right away (thus without any postponement), in 3 hours or in 24 hours (similarly, the options at the other extreme – in a year or in 10 years – have smaller values for the willingness to pay).

The simple fact that such exceptions exist brings a more complex understanding on the sources of utility and the tension that we commonly feel between present and the future.

 

Conclusions 

The traditional principles of economics are mostly focused on ideal situations, under the ideal status of an equilibrium state. In one of the influential textbooks of the field – The economic way of thinking – Paul Heyne and his colleagues point out this position from the very beginning, as the working referential, but they also signal that its nature, even if correct, can be extremely confusive. Their analogy is that good mechanics can identify the problem of a car because they know how the car works when it does not have any problem. The understanding of how an economic system should work is far from being that straightforward, so in many cases economists are more like mechanics that have only studied not-functional engines [22].

In the same line of the analogy, we observe a similar confusion about our own behaviors and personal disequilibrium, since we are missing trustworthy reference points concerning what constitutes an optimal way of achieving personal objectives and an equilibrium state. The paper hopes to contribute in solving this gap through the personal development interpretation of some representative behavioral economics concepts, and by setting a scientific position for how our mind actually works. The leitmotiv is of discourse is that of perfect functionality, for the economy and for the human mind. While these are still labeled under black boxes, technology and research have managed to somewhat reduce the surrounding uncertainty and to unveil, not always gradually or explicitly, parts of their puzzles.

Such an approach is important because it may minimize the resistance often encountered when personal development is associated to psychological treatment. The framing brought by behavioral economics goes more into counseling through the more objective framework of research and the algorithmic recommendations, firstly for understanding our own behavior and only afterwards for attempting to change it.

 

REFERENCES 

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