The theme of many of my posts involve the struggle between
our human behavior and judgment as they function in reality vs how they are incorrectly, but commonly, perceived to function. Actors Homo Economicus and Homo Sapiens are at the forefront of this long ensuing battle for public validity.
At a Glance
|
|
||||
|
|||||
Overview: Errs only
occasionally, usually due to circumstances not knowable at the time of
decision making.
|
Overview: Errs
Systematically.
|
A Closer Look
Homo Economicus (Econs)
Homo Economicus is "a rational actor who employs complex
algorithmic processing that follows rules of logic and probability in order to
maximize expected utility."[6]
While Homo Economicus does not always make perfect
forecasts, she never makes systematically wrong forecasts.[7]
Instead, when an error occurs she becomes aware of it and accordingly adjusts
her judgment, or upon finding insufficient regularities to draw a judgment
from, declines to make a forecast all together.
She is aware of all publicly known information and responds
accordingly.[8].If
a company’s accounting statements shows a looming liquidity crisis, prototypical
Econs are immediately aware and will sell off shares until the stock price
lowers to adequately reflect its true value.[9]
She is influenced by incentives – if a government taxes
candy less, then she will buy more candy. She is not influenced by immaterial
environment circumstances such as the order in which options are presented to
her.
Homo Sapiens (Humans)
Homo Sapiens, here played by Homer, employ judgment
primarily guided by a handful of leading heuristics (mental shortcuts). These
heuristics are used particularly when facing incomplete information, an absence of
stable environment, or complex problems.[10]
These heuristics, although fast, and efficient, can lead to imperfect judgment
in a slew of contexts, especially when forecasting future events.
Homer is influenced by superficial and irrational
factors. The order in which food is presented
to him in a cafeteria can increase his fruit and vegetable consumption
respectively 13% and 23%.[11]
Homer’s imperfect decision making is most easily illustrated
in the financial decision making domain. Whether in the context of a divorce
proceeding, saving for retirement, or regular consumer habits, we can find many
examples in which Homer fails to maximize his expected utility. For instance, Homer
will forget to cancel his 30 day free trial subscription resulting in the
undesired outcome of a debit charge.[12] Even worse, Homer will thereafter fail to
cancel his subscription and continue paying for goods or services he has no
desire to have (and sometimes for many months!).
Homer has a profound lack of awareness of known rules of logic and
probability[13]
and even easily accessible facts like occurrence rates of natural disaster[14].
Conclusion
Humans are NOT Econs. Further investigation should be done to
examine differences in how the actors respond in various situational
conditions.
[1] Richard
Thaler, Nudge: Improving Decision Making
about Health, Wealth, and Happiness, 18. (Framing the Homo Economicus vs
Homo Sapien concepts in regards to “Humans and Econs” was taken directly from Richard
Thaler’s Econs and Humans chapter in Nudge. Moreover, the term "Homo Economicus" is widely used and was not created by me).
[2] See
Thaler, supra note 1. (This, along with the next two anecdotal examples, was
taken directly from Richard Thaler’s Econs
and Humans chapter in Nudge).
[3] Id.
[4] Id.
[5]
See Generally Atkinson-Shiffrin Model; In pertinent part states that only a
select amount of information processed through our sensory memory is eventually
stored in our working memory (short-term memory) or long-term memory. More
information available at, http://users.ipfw.edu/abbott/120/AtkinsonShifrin.html
[6]
Kalu Kalu, Representative Hereustics vs Rules of
Probability, Generation B.C.
[7]
See Thaler, supra note 1.
[8] In
essence she encompasses the semi-strong form of the Efficient Capital Market
Hypothesis which asserts that a stock price incorporates all past and present public
(but not non-public) information. For more on Efficient Capital Market
Hypothesis see Robert Rhee, Essential
Concepts of Business for Lawyers, (2012), 290.
[9] Of
course the semi-strong form hypothesis is directly contradicted by evidence of
bubbles - extended periods of times in which stock prices were clearly
mispriced. Id.
[10] See,
Daniel Kahneman, Thinking Fast And Slow,
“In the absence of valid cues, intuitive “hits” are due either to luck or to
lies. If you find this conclusion surprising, you still have a lingering belief
that intuition is magic. Remember this rule:
intuition cannot be trusted in the absence of stable regularities in the
environment [emphasis added]”
[11]
Andrew Hanks, D. Just, B. Wansink, Smarter Lunchrooms Can Address New School
Lunchroom Guidelines and Childhood Obesity, The Journal of Pediatrics (2013), 2.
[12]
Thaler, supra note 1, 203-4.
[13]
See Kalu Kalu, Representative Hereustics vs Rules of
Probability, Generation B.C.
[14]
See Kahneman, supra note 10, at 204. In
pertinent part:
Strokes cause almost twice as many deaths as all accidents combined, but 80% of respondents judged accidental death to be more likely.
Tornadoes were seen as more frequent killers than asthma, although the latter cause 20 times more deaths.
Death by lightning was judged less likely than death from botulism even though it is 52 times more frequent.
Death by disease is 18 times as likely as accidental death, but the two were judged about equally likely.
Death by accidents was judged to be more than 300 times more likely than death by diabetes, but the true ratio is 1:4”)
No comments:
Post a Comment