I sat through a lot of economics courses while earning my MBA and my undergraduate degree. In those courses I learned that humans are hyperrational, all-knowing beings that always make decisions based on what’s best for their bank account. According to traditional economic theory, when it comes to their careers, human beings never take jobs because they sound cool, or to make the world a better place, or because it was the same job their father and grandfather had.
They never buy a $1,000 phone just to show people they can buy a $1,000 phone.
In other words, in economics classes I learned about human beings that act like no human being has ever acted.
And that’s how economics has always been taught. In the late 1800s, several economists formalized the ideas of Adam “The Invisible Hand” Smith into the idea of “homo economicus,” or the completely rational human that’s used as the model in nearly all basic economics education. Given the vast influence economists and Economics 101 has over policymakers and politicians, this flawed theory has been the basis for a lot of flawed policymaking.
That’s why multiple economists and psychologists began developing the field of behavioral economics. Daniel Kahneman, psychologist and author of Thinking, Fast and Slow, won the 2002 Nobel Prize in economics for his work on judgment and decision-making, and two days ago University of Chicago economist Richard Thaler won the 2017 Nobel Prize in economics for his contributions to behavioral economics and the study of decision-making.
Thaler is also known as the co-author, along with Cass Sunstein, of Nudge: Improving Decisions about Health, Wealth, and Happiness. Thaler and Sunstein’s work was used by both the Obama Administration and then-British Prime Minister David Cameron’s office to try and increase the effectiveness of government programs.
Kahneman and Thaler’s work should be celebrated, but it took literal centuries to recognize what most of us already know:
Human beings are weird. We are passionate. We are insecure. We can be incredibly generous, and incredibly stingy–often in the same day, and often for no discernable reason. We are unpredictable. We are usually the furthest thing from rational, and in no way resemble the all-knowing robots of traditional economic theory. Maybe the Artificial Intelligence we design will resemble the decision-making used by homo economicus, but then again AI is still designed and deployed by human beings, so maybe not.
In fact, probably not.
But that’s okay. When economists emphasized rationality, they ignored one of the best qualities of human beings: our ability to inspire. For example, there is no theory of human behavior used in traditional economics that accounts for some of the stories we hear about bravery and sacrifice after a tragedy.
Real humans are infinitely better than the model of a human used by most economists.
It might have taken too long for the field of economics to realize that, but better late than never.