Emotional Economics: the Psychological Basis of Decision Making

No, Emotional Economics isn’t the state of our sad economy.  It’s one more bullet hole in the old dog-that-won’t-die theory of “rational choice” in the social sciences.

Mathematical and Evolutionary game theorists have nearly done away with the idea of the rational actor:  Is a single-celled organism rational?  No.  But, it makes decisions that affect its evolutionary fitness level.

So do we.

And rarely do we make those decisions with full cognitive force.

Investors, he said, frequently take decisions contrary to “pure” economic judgment because they hate to admit they made mistakes in the past and because they may even be “wired” with a risk-taking gene that confounds objectivity.

Ooh, now that’s what I’m talkin’ about.

4 responses to “Emotional Economics: the Psychological Basis of Decision Making

  1. There is another force, too, one that is sometimes explicit: the desire to affect events and “the world” with investment decisions. This overlaps with hope that a particular product or service will succeed or fail.

    I offer “Green Investing” as Exhibit #1.

  2. Great point. Thinking of humans as “rational” actors is loaded with problems, and hope and emotional states are a part of it. We often don’t even know what are actual “utility” function is, let alone how we are to go about maximizing it.

    It’s better to just take strategies as a matter of fact.

    I’m very interested in the intersection of evolutionary game theory and economics, poli-sci, and the behavioral sciences. There is a lot to be learned by modeling us as we are: an animal species. Rather than modeling us as we wish we were.

  3. I have just googled emotional economics, and found your post. Very provocative for me.
    I got a question though. Is being rational really differ from making decisions based on basic survival instincts? If so, why and how? If economics models assume that we make decisions based on our own self interests, to maximize our utility, what about other species, don’t they make decisions based on those assumptions too?

    • The answer to your question is both Yes and No. Actually, I’m planning to post an article here discussing exactly this problem soon, so I won’t go too much into it.

      But, the main point is that the term “rational” has been both watered down from being something that resembled the normal English term (implying a higher cognitive function; conscious decision making) to one that could include bacteria; and it has been abused by critics of Economic theory who use the term in the English sense and ignore how it has been defined recently in the Economic sense.

      I suggest we drop the term outright. It causes more harm than good.

      Using the term rational to describe bacteria is just silly. It makes the term itself meaningless.

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