2019 National Council For The Social Studies Econs Vs .
Making Economics CoolSocial Education 83(2), p. 94–99 2019 National Council for the Social StudiesEcons vs. Humans:An Introduction toBehavioral EconomicsM. Scott Niederjohn and Kim HolderCan teachers promote true economic understanding among students by adding adose of psychology? Fans of behavioral economics, with its unique blend of psychology and economics, think so. Blending a bit of behavioral economics into socialstudies lessons provides answers to the ever-present questions that permeate everyclassroom,“What does this have to do with me?” and “When will I ever use this?”Teachers can help students understand behavior in the world that surrounds us bymoving them from a rote understanding of economic theory to a richer approach thatbrings in elements of psychology.economics, however, takes investigationinto human nature further and focuseson areas in which they are particularlychallenged in making good decisions.The results of these experiments haveled to a number of real-world insightsinto public policy, business, education,healthcare and many other aspects of life.Students exposed to behavioral economics find it appealing because itallows them to go beyond traditionaleconomic models. In the traditional economic approach, frequently referred toas rational choice theory, basic assumptions about human behavior are used tosimplify the model of how an economyworks. In contrast, behavioral economicsuses assumptions that are more closelyaligned with how people actually behave.The authenticity of behavioral economics resonates well with the currentgeneration and helps students see howeconomic analysis, augmented with psychological insights, can provide genuinesolutions to real world problems.Econs vs. HumansOne simple way to think about behavioral economics is to consider how actualpeople differ from those modeled in astandard economics textbook. Onemight argue that the field of economics looks at people as “econs”—that is,they assume we carefully weigh costs andbenefits of alternatives before makingdecisions. Econs, therefore, could bedescribed as being analytical, reflective,effortful, deliberate and patient. To befully rational, an econ would also needto be well-versed in probability theoryand rational optimization. Thus an econwould always make the best choice givena set of alternatives. Does this sound likemost people you know or interact with?Behavioral economists don’t think soeither. They instead think of humans asusing costs and benefits, but also beinginfluenced by other factors when making decisions. Humans might sometimesbe described as emotional, reflexive,effortless, impulsive, and short-sighted.If behavioral economists are right, theycan improve on the predictive ability ofthe models based on standard economicWhat is Behavioral Economics?The field of economics traces its roots toAdam Smith’s seminal work from 1776,An Inquiry into the Nature and Causesof the Wealth of Nations.1 In contrast,the field of behavioral economics datesback only about 50 years. In MichaelLewis’ 2017 book, The UndoingProject, Israeli-born psychologistsDaniel Kahneman and Amos Tverskyare credited with originating behavioraleconomics with human behavior studies in the 1960s.2 Their work over thenext 30 years helped lead to a field thathas directly or indirectly produced sixrecent Nobel Prizes in economic science,including the 2002 prize to Kahnemanand the 2017 award to Richard Thaler,the author of the popular book Nudge.3In his Nobel Laureate address Thalerstated, “In order to do good economics,you have to keep in mind that people arehuman.” This quotation helps explainthe insights that can be gleaned from thisfield of economic study.Frequently relying on experiments,behavioral economics points out thathumans are not always perfectly rational decision makers. While the field ofeconomics has always understood thisfact, the discipline does rest on theidea that people can accurately weighcosts and benefits to make decisionsthat maximize their own welfare.4 Evenif people make mistakes in the process,economists point out that models basedon rationality have nonetheless yieldedaccurate and useful results.5 BehavioralS o c i a l E d u c at i o n94
assumptions. Therefore, behavioraleconomists have focused on areas thathumans find especially difficult whentrying to make good decisions.Cognitive Biases: CommonMistakes Humans MakeImagine the following activity—referredto as The Ultimatum Game—taking placein your classroom.6 In this activity, halfof the students in the class are assignedto be “proposers” and the other half areassigned as “responders.” Each proposerhas to decide how to split 100 with arandomly assigned responder. The proposer may offer an even split or any othercombination. But if the responder rejectsthe offer, both the proposer and theirresponder get nothing.This game has been replicated bymany researchers using diverse samplesof people, and the results tend to beconsistent.7 The most common offer isa 50/50 split and both parties get 50.A more aggressive proposer might sayto a responder, “I get 60 and you get 40.” About 20 percent of such lowoffers to the responders (offers of lessthan a 50/50 split) are rejected. Theserejections are surprising to rationalchoice economists. Why? The answeris that rejecting 40, or any offer abovezero, seems irrational. The respondersare essentially choosing to punish themselves by not taking free money. Whywould they do this? The conclusion ofmost researchers is that people seem tocare about fairness, even when it may notbe strictly rational.Interestingly, this same sense of fairness seems to also exist among animals.Experiments have been done with capuchin monkeys, as well as with other animals, in which they are asked to do asimple task in exchange for a piece offood.8 Monkeys that are in cages next toeach other will do the task over and overagain for the reward of a piece of cucumber. However, if one of the monkeysgets a grape (which monkeys prefer tocucumbers) for the task, the animal thatcontinues to get a cucumber will revoltand actually throw the cucumber back atthe experimenter. Again, this seems irrational as the monkeys had been perfectlyhappy with cucumbers, but now they areovercome by a sense of unfairness whentheir neighbor gets a better reward. Evena monkey will punish itself—throw awayfood it likes—to make its point.Anchoring EffectA preference for fairness can push peopleaway from completely rational choicesbased on self-interest. Another such cognitive bias is the anchoring effect, sometimes referred to as the “framing effect.”With anchoring effects in play, people’sdecision-making is influenced heavily bythe first piece of information offered orthe most familiar piece of information.Thaler and Sunstein provide an exampleof Chicago residents who were asked toguess the size of Milwaukee, Wisconsin.9Because their subconscious anchor is thecity they know well, Chicago, they willtend to guess too high—guessing aboutone-third the size of Chicago, or about1 million residents. People from GreenBay, Wisconsin, do the same thing, butuse what they know, Green Bay, as theiranchor. They are likely to guess aboutthree times bigger than their hometownor about 300,000 inhabitants. It turnsout the correct answer is between thetwo; about 580,000 people reside inMilwaukee.Well-known behavioral economistDan Ariely shows an anchoring effectin pricing using The Economist magazine in his book Predictably Irrational.10Examine Visual 1, above right. You canget access to all of the web content for 59, a subscription to the print editionfor 125, or a combined print and websubscription which is also priced at 125.Intuitively, the offer of the print-aloneoption seems absurd. Nobody wouldrationally choose to forgo web accesswhen it costs nothing extra, so why evenlist it? Why not just say that the printsubscription also includes access to theweb archives?Visual 2 helps to demonstrate theanswer. Predictably, when all threeoptions were available, nobody choseM a r c h / A p r i l 2 0 1995the print subscription alone; 84 percentopted for the combination deal and 16percent picked the web subscription.However, then Ariely repeated the pollwithout offering the unpopular printonly alternative. After all, nobody waschoosing it, so what difference could itmake to leave it out? In this second timearound, 32 percent wanted the printVisual 1Visual 2subscription, while 68 percent preferredto go web-only. It appears that the presence of the clearly inferior option alteredthe decision process by making the combined web and print subscription seemlike a better deal. Print only becamean anchor as the most familiar piece ofpricing available and people concludedthey might as well buy the combinationof print and web access because it wassuch a great deal. Even so, this anchoringeffect drove consumers toward choosingthe much more expensive option.Loss AversionIn the book and movie Moneyball,Oakland A’s General Manager BillyBeane stated, “I hate losing more thanI even wanna win.”11 While he may not
can be a difficult problem for humansto overcome; however, recognizing howit can affect decision-making may helppeople avoid situations where it canbe a detriment. Here are some classicexamples of loss aversion:Loss aversion isthe notion thatlosses have a biggerpsychological impactthan gains do. Not selling a stock that is below theprice paid simply to avoid takinga loss or not being able to weatherlosses in the stock market becausethe loss hurts more than gains.12have known it, this quip illustrates theconcept of loss aversion. Loss aversionis the notion that losses have a biggerpsychological impact than gains do. Thatis, losing 5 feels worse than the goodfeeling from gaining 5. Loss aversion The unwillingness to sell a homebelow the price that was paid for it. Making a decision based on the mistaken logic (or fear) that you mightmiss out on it, particularly whenthe potential loss is emphasized asit often is in retail advertising thatfocuses on trigger words like “lastchance” or “Don’t miss out! Actnow!” Firms offering free trial periods.Once a consumer has the product,they become much less willing togive up something they are used tohaving. When airlines increased the amountof money offered to passengers inorder to encourage more of themto voluntarily give up their seats onflights, consumers instead chose toretain their seats at an even greaterrate than before since they wanted10 Popular Press Books for Your ClassNudge: Improving Decisions about Health, Wealth, and Happiness, byRichard H. Thaler and Cass R. Sunstein, is essential for understanding behavioral economics, applying it to influencing policy, andthe philosophical debate about how behavioral economics is used.The Undoing Project: A Friendship that Changed Our Minds, byMichael Lewis, chronicles the collaboration between DanielKahneman and Amos Tversky and their original research whichchanged our thoughts about how decision-making happens.Thinking, Fast and Slow, by Daniel Kahneman, dives deeper intohis research in how the brain functions in two different systems,each with quirks and flaws, with insight into how choices are madeand which system we should rely on.Predictably Irrational: The Hidden Forces that Shape Our Decisions, byDan Ariely, explains how our subconscious behavior underminesour best interest and that we are at the mercy of these hiddenmechanisms if we do not become aware of them.Why Smart People Make Big Money Mistakes and How to CorrectThem: Lessons from the Life-Changing Science of BehavioralEconomics, by Gary Belsky and Thomas Gilovich, considers howdecision-making and behavioral psychology play a role in whypeople make foolish decisions with their personal finances.The Invisible Gorilla: How Our Intuitions Deceive Us, by ChristopherChabris and Daniel Simons, focuses on research in social sciencethat highlights how our eyes can deceive us since our brain oftenoverrides our reality. In particular, understanding this shortcomingis important to acknowledge our hidden biases.The Person and the Situation: Perspectives of Social Psychology, byLee Ross and Richard Nisbett, is an introduction into how theenvironment around us influences our decisions, even if we thinkwe are not taking it into account.Misbehaving: The Making of Behavioral Economics, by Richard H.Thaler, is the personal story of Thaler’s career in developing behavioral economics, highlighting his research and anecdotal storiesthat challenged traditional economic thinking.The Paradox of Choice: Why More is Less, by Barry Schwartz,describes in depth the idea of consumers’ “Fear of Missing Out”(FOMO) and how too many choices often result in greater depression and unhappiness due to the perceived losses of the abundantforegone choices. While freedom of choice is important, in thiscase it comes with a cost and a given decision-maker might bemarginally happier with a limited range of options.The Art of Choosing, by Sheena Iyengar, is a psychologist’s perspective of the impact of choice on our lives and highlights aninterdisciplinary approach that combines the impact of biology,sociology, economics, and political science on the day-to-daychoices we make.S o c i a l E d u c at i o n96
to minimize their greater perceivedlosses.13 When energy bills include usagecomparisons for a neighborhood, aheavy-use customer will decreaseconsumption slightly. However, ifthis comparison also includes afrowny-face, highlighting “losing” vs. neighbors, energy use willdecrease by an even greater degreein order to avoid the loss.14Status Quo (or Default) BiasPeople tend to prefer the status quo,even when more attractive options arepresented to them. Why do companiesdo free, limited time offers for thingslike magazine or cable TV channels?Probably because they understand thestatus quo bias and that most people,once they have something, won’t extendthe energy to cancel it (even if they arenot using it) due to inertia. If a statechooses to opt people into a programthat allows their organs to be used in caseof a tragic accident, then most of thosestates’ residents will be in the program.If a state requires that you opt yourselfin, much lower percentages of residentswill be in the program.Nudges: Using BehavioralEconomics in the Real WorldBehavioral economics has the potentialto influence public policy and improvehuman decision-making. The governmentof the United Kingdom took this workso seriously that it created a behavioralinsights team nicknamed “The NudgeUnit” after Thaler’s well-known book.15The most famous example of the useof behavioral economics to improvedecision-making is in the area of retirement contributions. Behavioral economists were interested in why so manyAmericans typically chose not to signup for their 401(k) plan—even whenit included a “free” employer match ofsome kind. They surmised that the reasonwas a form of status quo bias. People hadto actually fill out some forms and opt intothe program. If instead the process wasAn example of the anchoring effect is that when New York City taxi cabs changed from allowingthe rider to choose a tip to offering options like 15 percent, 20 percent and 25 percent, their tipsrose, on average, by 8.7 percent. (August 1, 2018, AP Photo/Mary Altaffer)reversed, and people were automaticallyopted in but had to opt out if they did notwant to participate, more would join andtake advantage of the employee benefit.It turns out that the behavioral economists were right. Before automatic enrollment about 37 percent of employeesparticipated in these programs and afterautomatic enrollment, almost 86 percentdid. This experiment led to changes inlaw and regulation that now allow firmsto opt their employees into their retirement plans (with an opt-out available).Automatic opt-in is an example of anudge—a small change that pushes peoplein a direction that will ideally make thembetter off.Is there a downside to nudges? Someare concerned that this type of relianceon behavioral economics to manipulateseemingly small decisions leads to government intrusions into private decisionmaking. A key aspect of a true “nudge”is that it leaves courses of action open.Someone who truly does not want to optinto a retirement plan still has that choiceunder automatic opt-in. When a seemingly innocent choice becomes mandatory, the nudge turns into a shove. Evenso, well-placed nudges may improvepublic policy outcomes while still leavM a r c h / A p r i l 2 0 1997ing options open and freedom to choose.Beyond government policies, theanchoring effect is prevalent in ourdaily lives. It explains why charitiestend to give you some suggested dollaroptions for giving—they hope that thelowest option anchors your mind thatyou certainly shouldn’t give less thanthis. In addition, when New York Citytaxi cabs changed from simply allowing the rider to choose a tip to insteadoffering options like 15 percent, 20 percent and 25 percent, their tips rose, onaverage, by 8.7 percent. Again, people’sminds were anchored to the idea thatthe lowest option is the bottom and thatthey needed to choose this or somethinghigher, whereas their prior anchor mayhave been not to tip at all.If you pay close attention to marketing and advertising, you are likely to beconfronted with the idea of loss aversion.Rather than highlighting the features of anew fast-cooking oven, the manufacturermight focus on the loss of time if youdon’t buy it. Banks might focus on theloss in fees if you don’t switch to theirnew no-fee checking account. You mightlose your mobility if you don’t buy thiswheelchair or walker, rather than gainingnew independence.
Today is the daylearning turns intoleading.People tend toprefer the statusquo, even whenmore attractiveoptions arepresented to them.Richard Thaler’s research is full ofinteresting “nudges” like these. Themost fun example might be the actionsof the Amsterdam airport. Whenthe facility tired of excessive spillage around the urinals in their men’sbathrooms, they chose to make a smallchange. They inserted a very reallooking image of a fly in each urinaland spillage declined dramatically.Apparently a little nudge—somethingto aim at—made a huge difference.16“I highly recommend this onlinemaster’s in history program. It gaveme the confidence in my professionto become a better teacher for mystudents. Because of this program,I was able to apply for my dream job.I can now teach at the college level,which is what I’ve always wanted todo. This program has made me whoI am today.”Laura EnomotoHistory, MAUniversity of Nebraska at Kearneyonline.nebraska.eduConclusionThese examples highlight the widerange of insight that behavioraleconomics offers into everydayhuman behavior. Many more applications are possible. For example,recent research in education policyfocused on using simplified, lowcost mailers to inform low-income,high achieving students about theiroptions for college. This implementation of nudging is being used tohelp expand college opportunitiesto those who might benefit the mostfrom investing in their human capital.17 Additionally, automation of textmessaging for important remindersrelies primarily on the use of nudges.Reminders have been shown toincrease persistence in overcomingthe status quo for missing deadlines—we see this use daily in education,healthcare, retail, and even by politicians to encourage desired outcomes.On a lighter note, long-time fansof The Simpsons will find an interesting and humorous analysis onthe spectrum of irrational behaviors exhibited by all of the Simpsonfamily members, particularly HomerSimpson who, like many of us, isconsistently bad at making goodchoices.18 Sports fans will discovereven more real-life examples ofpersistent decision-making bias andflawed reasoning layered within thebook and film Moneyball and seehow acknowledging and address-Lessons for the ClassroomBehavioral Economics Lesson Four —Why Are We So Impatient? highlights theone inherent flaw in assuming that people are perfectly rational decisionmakers by showing what happens when we compare costs vs. benefitsthat occur in the future. This classroom demonstration illustrates why weare impatient and choose what benefits us immediately, especially whencosts are realized in the future. esson-four-why-are-we-so-impatient/Behavioral Economics Lesson Five—Other Things Matter demonstrates howyou can play the Ultimatum Game with your students to prompt a discussion of decision-making for Humans vs. Econs and how other factorsinfluence economic behavior lesson-five-other-things-matter/). Download all of theBehavioral Economics lessons from the Council for Economic he-behavioral-economicslessons/.S o c i a l E d u c at i o n98
ing these flaws, with the help of aneconomist, allowed them to builda competitive team.19 Most recently,behavioral economics was featuredprominently in the hit 2018 movie,Crazy Rich Asians, which focused ontwo characters’ strategies navigatingfamily dynamics and focused on thepowerful influence of loss aversion. 20As the fields of psychology andeconomics become more deeplyintertwined and continue to adaptand learn from each other, evenmore relevant and active uses ofbehavioral economics are in ournear future. Students, teachers, parents and policymakers can all benefit from the insights of behavioraleconomics and leverage its power.Integrating these brief lessons andfacilitating an open and active discussion will help spark curiosityinto this emerging area of study andimprove the relevance of economicsfor your students.Notes1. Adam Smith, 1723–1790. The Wealth of Nations;Edited, with an Introduction and Notes by EdwinCannan (New York: Modern Library, 1994).2. Michael Lewis, The Undoing Project: AFriendship that Changed the World (New York:W.W. Norton & Company, 2017).3. Richard H. Thaler and Cass Sunstein, Nudge:Improving Decisions about Health, Wealth, andHappiness (New Haven: Yale University Press,2008).4. Adam Smith’s less famous book The Theory ofMoral Sentiments (London: Pantianos Classics,1759) makes it clear that he believed much ofhuman behavior was under the influence of the“passions” or emotions, such as fear and anger, butthat these passions were moderated by an internal“voice of reason.”5. Milton Friedman, Essays in Positive Economics(Chicago: University of Chicago Press, 1953).6. A version of this game is contained in a lessonreferenced at the end of this article from theCouncil on Economic Education in the “Lessonsin the Classroom” section.7. Werner Güth, Rolf Schmittberger, and BerndSchwarze, “An Experimental Analysis ofUltimatum Bargaining,” Journal of EconomicBehavior and Organization 3, no 4 (December1982): 367–388.8. TED Blog Video, “Two Monkeys Were PaidUnequally: Excerpt from Frans de Waal’s TEDTalk,”(2013),www.youtube.com/watch?v meiU6TxysCg.9. Thaler and Sunstein, Nudge: Improving Decisionsabout Health, Wealth, and Happiness.10. Dan Ariely, Predictably Irrational: The HiddenForces That Shape Our Decisions (New York:Harper Perennial, 2009).11. Michael Lewis, Moneyball: The Art of Winningan Unfair Game (New York: W.W. Norton andCompany, 2004).12. Gary Belsky and Thomas Gilovich, Why SmartPeople Make Big Money Mistakes and How toCorrect Them: Lessons from the Life-ChangingScience of Behavioral Economics (New York:Simon and Schuster, 2010).13. Hideki Fukui and Koki Nagata, “Do BumpedPassengers Exhibit Loss Aversion? Evidence fromthe U.S. Airline Industry” presented at the ITEAAnnual Conference and School on TransportationEconomics (Barcelona, Spain, 2017).14. Center for Environmental Behavior, “NudgingEnvironmental Behavior” (Davis, Calif.: UCDavis, 2013), . The Behavioral Insights Team in Partnership withthe United Kingdom Government’s CabinetOffice, “Who We Are” (2014), www.behaviouralinsights.co.uk/.16. Big Think, “Improving Men’s Urinal Aim: AnExample from Nudge by Richard Thaler” (2012),www.youtube.com/watch?v OaLGg1wYztk.17. Caroline M. Hoxby and Sarah Turner, “TheHamilton Project–Informing Students about theirCollege Options: A Proposal for Broadening theExpanding College Opportunities Project,”Brookings Institute Discussion Paper 2013–03(June 2013): 1-32.18. Jodi Beggs, “Homer Economicus or HomerSapiens? Behavioral Economics in The Simpsons,”in Homer Economicus: The Simpsons andEconomics, ed. Joshua Hall (Stanford, Calif.:Stanford University Press, 2014), 161–176.19. G. Dirk Mateer, Brian O’Roark, and Kim Holder,“The 10 Greatest Films for Teaching Economics,”The American Economist (2016): 1–13.20. Cornell University, “Game Theory in Crazy RichAsians” (Ithaca, N.Y.: Cornell University, . Scott Niederjohn is Dean of theSchool of Business and Entrepreneurship,Charlotte and Walter Kohler Professor ofEconomics, and Director of the Center forEconomic Education at Lakeland Universityin Sheboygan, Wisconsin. Kim Holder isDirector of the Center for Economic Education and Financial Literacy at the Universityof West Georgia in Carrollton, Georgia, anda Lecturer of Economics in UWG’s RichardsCollege of Business.M a r c h / A p r i l 2 0 1999Online History, MAUniversity of Nebraskaat KearneyApplication deadlinefor fall semester isJune 15. If you’d liketo start this summer,contact us aboutoptions for taking acourse or two. Thesis and Non-ThesisOptions Low Student toFaculty Ratio Extensive OnlineCourse Offeringsin Areas Such asAmerican, European,World, Public andDigital Historyonline.nebraska.edu
Econs vs. Humans One simple way to think about behav-ioral economics is to consider how actual people differ from those modeled in a standard economics textbook. One might argue that the field of econom-ics looks at people as “econs”—that is, they assume we carefully weigh co
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