How Emotional is Behavioral Economics?
Behavioral Economics is garnering more and more attention everyday. As it should be – the brain subscribes heavily to heuristics and mental models in order to process information efficiently. Our preferences are highly malleable and are usually constructed on the fly – which is why any field studying descriptive decision making would be incomplete if it didn’t take into account the effects that the decision context and decision frames have on our choices. Which is all very good for Behavioral Economics.
Daniel Kanhneman, Richard Thaler, Senthil Mullainathan, amongst many others drive this field and are creating a massive shift in thinking across several domains in classical economics – savings, investment, wealth, losses, gains. The definition of Behavioral Economics is wide. “It studies the effects of psychological, social, cognitive, and emotional factors on the economic decisions of individuals and institutions and the consequences.” However, whilst the definition mentions ‘Emotional’, the reality is that the literature on Behavioral Economics falls painfully short when it comes to Emotions. System 1 & System 2, Prospect Theory, Choice Architecture, Choice Bracketing, Heuristics and Biases – whilst talking about how human beings are ‘economically irrational’ and the role of emotions in decision making, barely scratch the surface of the nuances of the Emotional System. Which is a pity, because Emotions do not merely play a role in Decision-Making, they guide the decision-making process. There are no decisions that are devoid of emotions, even ones that might seem extremely calculated and ‘rational’. We’ve written about the omnipotent role of Emotions before, here.
The brain is continuously appraising our larger context, the surrounding environment and stimuli, and basis these appraisals – which could be non-conscious, or completely deliberative, the emotional system responds – determining action tendencies, and ultimately actions. These emotional responses clue us in on the values we attach to things and our motivations. People with damaged emotional circuits are severely hampered in their ability to make even the simplest of decisions. The essence is not in the simplicity of emotions as we colloquially understand but in the complex determinants of emotions. In understanding the role that aspects like Individuals Goals, Relevance to Decision Maker, Self-Image, Sense of Control, Ability to deal with the Outcomes play. The handles that these provide in explaining decision making, understanding behavioral outcomes and influencing preference changes are invaluable.
Lets talk about Investing – To Buy or Not is driven by two dominant emotions that come into play and drive all decisions. The ‘Fear of Losing’ and the ‘Fear of Losing Out. Fear all the same. With all its positives and ramifications when fear has only cognitive underpinnings. Whilst Behavioral Economics talks about this aversion to loss, the emotions behind it – the aversion/avoidance that are driven as a result of Fear and anxiety are not detailed. Whilst felt Emotions are a huge driver of decisions, Anticipated Emotions are an even stronger influencer – anticipation of gains, losses, happiness, sadness, loss of control are very very powerful and are strong elicitors of Preference Reversals. Again, a lot of the Heuristics and Biases that Behavioral Economics talks about are driven fundamentally by Uncertainty – another powerful emotional mediator. Our decisions might not maximise economic utility, but are most often maximising emotional utility.
For Behavioral Economics to become more powerful and impactful, therefore, there is an immediate need to place emotions at the centre of this conversation so one is able to see the source of heuristics that drive our behavior and then work on one or more dimensions of the emotional determinants to influence decision making and behavioral outcomes. At FinalMile, studying these emotions is central to our process. We use insights/learnings from Cognitive Neuroscience as well as Behavioral Economics, to design our EMGRAM framework which allows us to make sense of the Emotions associated with any problem Context.
– Written with Anurag Vaish