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19
DEC 14

Make policy for real, not ideal, humans




The following was published in the financial times - to read the full article, click here.

Out of the crooked timber of humanity, no straight thing was ever made. This famous remark of the German philosopher, Immanuel Kant, is particularly relevant to economists. “Homo economicus” is far-sighted, rational and self-interested. Real human beings are none of these things. We are bundles of emotions, not calculating machines. This matters.

The World Bank’s latest World Development Report examines this territory. It notes that “behavioural economics” alters our view of human behaviour in three ways: first, most of our thinking is not deliberative, but automatic; second, it is socially conditioned; and, third, it is shaped by inaccurate mental models.

The Nobel laureate, Daniel Kahneman, explored the idea that we think in two different ways in his 2011 book Thinking, Fast and Slow . The need for an automatic system is evident. Our ancestors did not have the time to work out answers to life’s challenges from first principles. They acquired automatic responses and a cultural predisposition towards rules of thumb. We inherited both these traits. Thus, we are influenced by how a problem is framed.

Another characteristic is “confirmation bias” — the tendency to interpret new information as support for pre-existing beliefs. We also suffer from loss aversion, fierce resistance to losing what one already has. For our ancestors, on the margin of survival, that made sense.


tags: bias, confirmation bias, behaviour, daniel kahneman, martin wolf, incentives
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