Was Adam Smith a behavioral economist as well!

Yes Indeed! Nava Ashraf, Colin F. Camerer and. George Loewenstein say so in this paper.

Adam Smith’s The Wealth of Nations, first published in 1776, helped create the discipline of economics with its conjuring of the invisible hand, self-interest, and other explanations of market forces that have influenced academics, governments, and business leaders ever since. But it’s the insights from one of Smith’s earlier works, The Theory of Moral Sentiments, that caught the attention of Harvard Business School professor Nava Ashraf and coauthors Colin Camerer and George Loewenstein.

In “Adam Smith, Behavioral Economist,” published in the summer 2005 edition of The Journal of Economic Perspectives, the authors find that Smith’s insights from 1759 can contribute to modern thinking on everything from our fascination with celebrity to the theory of loss aversion. In fact, says Ashraf, Moral Sentiments presages the emerging field of behavioral economics.

Nava Ashraf explains in this HBSWK interview:

Ann Cullen: How did you and your coauthors come to be interested in this lesser known publication of Adam Smith?

Nava Ashraf:Several years ago while taking a graduate course at Harvard on the Scottish Enlightenment, I wrote a paper called “The Morals of a Market Society” focusing on the virtues Smith wrote about in The Theory of Moral Sentiments (TMS). Once I started more research in behavioral economics, I realized how closely Smith’s work from TMS related to this emerging field. Indeed, it looked very much like the field of behavioral economics, which economists usually think of as a “new” field, was in fact rigorously studying the very factors that Smith, arguably the “father” of modern-day economics, had always thought were critical in human behavior and interaction.

Simultaneously, both my esteemed coauthors, Colin Camerer and George Loewenstein, had been exploring TMS and had mentioned in their own work how important it was for economists to read this lesser known work. So it was great fun for the three of us to write this paper, to bring together Smith’s insights with advances in behavioral economics research. Our hope is that it encourages people to go back to TMS and read it for themselves—it’s a truly wonderful book.

What are the main Smith thoughts that make him a beh economist??

Q: According to your article, Smith’s Theory of Moral Sentiments argues that behavior is determined by a struggle between “passions” and the “impartial spectator.” What did he mean by this?

A:Smith believed that much of human behavior was under the influence of the “passions”—emotions such as fear and anger, and drives such as hunger and sex—but these passions were moderated by an internal “voice of reason,” which he called an “impartial spectator.” The impartial spectator allows one to see one’s own feelings and the pulls of immediate gratification from the perspective of an external observer. In the area of self-control and self-governance, the impartial spectator takes the form of a long-term interest (i.e., I won’t have that cookie today because I can see that I will regret it down the road). In the area of social interaction, the impartial spectator allows us to see things from another’s perspective rather than to be blinded by our own needs.

The conflict between the passions and the impartial spectator is the most fascinating part of Smith’s TMS for me. The conflict is particularly important when studying savings decisions, since savings is exactly a decision to delay immediate gratification for a long-term interest, to stay the voice of a short-term pull for the voice of the impartial spectator.

With my coauthors I applied this framework to designing a savings product for a bank in the Philippines that helps clients act in line with their long-term interests. In this “commitment savings product,” clients sign a contract with the bank that doesn’t let them withdraw their own money until a certain amount or date has been reached. It gives their control over to the bank to help them overcome short-term impulses to spend. The product had a large and significant effect on clients’ total savings, helping clients to buy land, improve their businesses, pay for large educational expenses, etc.

The paper on Phillipines’ saving product is here and Ashraf’s other research is here.

To show Adam Smith as a behavioral economist and his work as a presage for beh eco is simply crazy. Again, if you don’t know history you are bound to be surprised. But this is just too much of a surprise. It is  a complete shock….

I was completely unaware about this paper for a long time. This paper was publised in 2005 and I just found it now. Needless to say it is pretty exciting.

5 Responses to “Was Adam Smith a behavioral economist as well!”

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