The way our brains work is key to understanding how consumers really make choices, argues Nobel Laureate Daniel McFadden.
Some consumers suffer from “agoraphobia” or a fear of markets according to new research presented by Nobel laureate Daniel McFadden that throws doubt on the classical idea that people are driven by relentless and consistent pursuit of self-interest to maximise their well-being. Professor McFadden entitled his paper The New Science of Pleasure, to purposefully play on a phrase coined by Anglo-Irish political economist Francis Edgeworth some 130 years ago.
He told the audience of young economists and fellow laureates at the 5th Lindau Meeting on Economic Sciences on 22 August that new studies of consumer behaviour that drew on psychology, sociology, biology and neurology gave economists a deeper understanding of how consumers made choices.
Rational analysis says that we should relish choice and the opportunities offered by markets. “Yet we are in fact challenged by choice and we use all kinds of ways such as procrastination to avoid having to make choices. One of the reasons is that there are risks associated with making choices,” he said.
…Interestingly pleasure and pain are in different circuitries in the brain while decisions involving gains or losses take place in separate parts of the brain. The net result is that there is therefore a physiological basis for the cognitive anomalies such as loss aversion, the endowment effect and hyperbolic discounting that psychologists have identified.
The classical economic of choice is therefore far too simple as it does not capture what goes on in people’s brain when they make choices. “It is also much too static to capture the sensitivity and dynamics of the process,” he said.
However he said that welfare economists based on neurological measures of utility and brain functioning was coming. “But we are not there yet. Wait for it – but even better get involved in the types of research and the bridge between economics and other disciplines and play a role in making this come true.”
Behavioral economics is gradually and slowly gaining respect amidst mainstream economists..