Behavioral economists try to unravel
human mysteries
(April 2006 Issue)

Laurie Santos, Ph.D., currently a visiting scholar at Harvard University, says that behavior economics begins with an assumption that humans act on a rational principle. (photo by Tom Croke)

By Phyllis Hanlon

Federal studies show that approximately 45 million American adults continue to smoke despite proactive public campaigns and increased awareness of the dangers of tobacco. Commuters flock to the nearest Starbucks where they dish out close to $5 for a cup of coffee. In spite of advice to save for retirement, a significant portion of the population fails to put money aside for those golden years. What makes people act irrationally when scientific data - or common sense - indicate that behavioral changes would be wiser? Behavioral economists are trying to find the answers to that question.

The Investor Dictionary defines behavioral economics as the application of "scientific research on human and social cognitive and emotional biases to better understand economic decisions." Researchers record findings after observing individuals engaged in simulations that include investing, trading, purchasing and other economic activity. Brain scientists have gone a step further and used functional magnetic resonance imaging (fMRI) to chronicle brain activity at various times throughout the economic decision making process. Psychologists employ behavioral economics in various ways.

Cognitive psychologist Laurie Santos, Ph.D., assistant professor of psychology at Yale, currently on sabbatical and visiting scholar at Harvard, says behavioral economics begins with the assumption that humans act on a rational principle. "The psychological approach builds on that [assumption]. Humans don't behave rationally, but specific to context. They frame a problem in where they are now." Santos further explains that individual characteristics influence all behavior. "People have weird biases but if bias doesn't get you more 'stuff,' why do we have them?" she says. "I look at the origins of how we make decisions."

Santos conducts experiments with primates to decipher human behavior. "After all, monkeys have no money or stock brokers. The [initial] experiment was designed to see if monkeys show 'loss aversion'," she says.

In Santos' study, monkeys traded tokens for grapes. In one scenario, the monkeys expected to receive two grapes for their tokens, but to their delight, they received three. In a second scenario, the monkeys received only three grapes when they had expected to get four. "The monkeys were mad at the guy who gypped them. Even without the experience of money, the monkeys showed loss aversion, so the pattern of loss can't come from human experience," she says.

So how do monkeys and grapes apply to the real world? Santos indicates that the findings of this and subsequent studies will interest the business world and others and help predict human behavior.

Indeed, financiers are taking note of these studies. In October 2005, the Boston Federal Reserve Bank created the first behavioral economics center in the country. According to Jeff Fuhrer, Ph.D., research director at the center, current economic trends are prompting intense study in this area. "Findings could be applied to the labor market, financial market and organizational behavior." He notes that man faces "constraints in decision making" and must optimize a situation to arrive at the best option.

Fuhrer says that Federal Bank staff is trained to look at the 'rational man theory.' "But it's more complicated than that. Maybe a person doesn't know his preferences. Circumstances might change a situation. Or the person might regret a decision he made yesterday," says Fuhrer. "Also, he might react to what others are doing. Emotion matters, not calculations."

Fuhrer asks, "Why is a large fraction of the population not saving?" Even though individuals understand the importance of saving during peak earning years, they fail to do so. Fuhrer suggests that people might place a high value on today and a lesser value on tomorrow. Or the problem could be "framing," he says. "The way you ask a question has something to do with it." The times in which you live also influence behavioral patterns. "Parents who grew up in the Depression are savers. Their children who grew up in the 70s and 80s - a time of prosperity - are not savers." Fuhrer says.

So why is the Federal Reserve Bank interested in this topic? "Behavioral economics documents anomalies in behavior at the individual level. Do those individual findings aggregate into something the Fed should worry about? We need to understand how people make decisions, how complicated their lives are, to have a better understanding of the environment." says Fuhrer.

William Ahearn, Ph.D., the director of research at the New England Center for Children (NECC) and clinical assistant professor in the Masters in Applied Behavior Analysis Program at Northeastern University, applies behavioral economics lessons to individuals with autism and other developmental disabilities. "Social interactions that most individuals would find pleasing aren't that way for autistic kids. We have to figure out a way to motivate them to learn," he says. "Behavioral economics offers a way to look at individual behavior and the things that seem to motivate, then determine which ones will motivate enough to engage in appropriate behavior."

Similar to Santos' primate experiments, Ahearn uses a "token economy" at NECC. "We take the things kids like and offer choices so they can trade in the tokens," he says. "If a kid engages in self-injury or aggression, we can identify the function of the behavior, then figure out how to get the same results by engaging in appropriate behavior."

An interesting application of behavioral economics came out of the University of Vermont where Matthew Johnson, Ph.D., conducted a study analyzing tobacco smoking substitutes. Johnson, now a fellow at the Behavioral Pharmacology Research Unit at Johns Hopkins University School of Medicine, says smoking explores some basic issues. "There is a whole range of pleasurable factors. The sensory experience matters - drawing in smoke and the taste, smell and touch and other non-pharmacological cues," he says. "So it's not only the nicotine they enjoy, but also the act of smoking itself. I am hoping the findings can be applied to drug and alcohol abuse and generalized to other drugs."

Eventually, behavioral economists hope to unlock some of the mysteries driving human behavior that have stymied researchers since the beginning of time.

Leading Stories | Columns | Book Reviews | Hospital Directory
Residential School Directory | Advertising | Classifieds | About Us