11.1: Classical Economics
Our minds work in interesting ways. One of the main goals of this text is to get to know ourselves a bit better. One way to do that is to look at the weird way our minds are put together and the weird habits of mind that result. This chapter aims to explore what are sometimes called “cognitive biases”—or quirks of the way we naturally categorize and make sense of the world around us.
Economics is the study of the exchanging of goods. Classical economic theory sees humans who exchange goods (like money, cologne, gasoline, labor, time, etc., etc., etc.) as rational actors. The way to model human decision making, according to classical economic theory, is to treat each actor as faced with the problem of finding the most optimal action available.
Take Zito Here:
Zito has a variety of choices available to him. He can drag the log behind him. He can carry the log around while walking on his hind legs. He can attempt to remove the shackle. He can throw the log in a river. And so on. Each of these options has an upside and a downside. A cost and a benefit. Here’s what actually happens:
BEAR AND LOG
WELL, now, here is a wonderful thing!
This great, huge log to my leg will cling.
I’ll get rid of you soon, I will;
I’ll carry you straight up yonder hill,
And send you splashing, before I go, Into the river that runs below.
The poor old bear he had reckoned wrong—
The great log bore him with it along;
Over and over he roll’d on the ground
Till the brains in his head seem’d whirling round.
He’d thought to free himself, but instead.
He lay on the ground with the log, half dead.
(Wilhelm Hey, Picture Fables)
Ouch. Zito appears to have made the wrong decision. He was faced with an optimization problem: the problem of finding the best available action, and he failed.
According to classical economic theory, the explanation is simple: Zito was being irrational. According to a more recent movement in psychology, social science, and what is now called behavioral economics, we shouldn’t be so quick to judge. Especially if we see the same sort of thing happening over and over—people (or bears) making similar decisions that seem to be irrational; then we should investigate the possibility that they aren’t be irrational. We should see if there’s a general rule that is being applied to make these decisions and see if we can make sense of why those rules might in general be helpful—even if they aren’t being helpful in the scenario that piqued our interest.