Thursday, April 9, 2009

Adam Smith the Original Behavioral Economist - revisit

It appears that today, Behavioral economics is experiencing a new surge in popularity given the lack of confidence resulting from the current crisis. Here is an interesting paper from The Journal of Economic Perspectives titled Adam Smith, Behavioral Economist This is quite interesting because it discusses some of the behavioral lessons noted by Adam Smith in his work the Theory of Moral Sentiments and notes their persistent relevance throughout time. In a cut it discusses such things as the fact that modern brain imaging has found that we process both gain and loss in two different regions of the brain. Thus it perhaps is not so far fetched to think that we evaluate loss and gain differently. Thus Smith understood that humans are impulsive, irrational, and altruistic at times as well as rational. The irony is that this is epic-ly obvious to most any normal person. Thus the historical approach seems to be more holistic and heuristic than coldly deterministic. My humble metaphor to this situation is that, it seems that when you evaluate an agents behavior, it is not wrong to assume that he will maximize his utility... I just think that the scope or 'lens' with which you gaze upon him needs to be appropriate. The traditional lens appears to be in terms of monetary gain or other solitary lever.
It seems you should view the utility maximization from a differential point of view with multiple lenses. An additional set of lenses should include an Evolutionary framework as well. Lenses that focus on the evolutionary modules such as mating, survival, and reciprocity would be helpful I think. Gad Saad discusses the idea of using an Evolutionary Framework for Consumption analysis in his book 'The Evolutionary Bases of Consumption.' It is quite good and I would recommend it, although I'm not all the way through it yet.

An Aside on human behavior as related to running a business:

An interesting tidbit, research states that for every bad piece of news from a 3rd party trusted source, a company must at least receive 3 pieces of good news from a 3rd party trusted source to counterbalance the negative effect. Added to that any news and findings generated by the company itself are automatically discounted by 50%. Notice the asymmetry in human behavior related to information processing.

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