According to a practitioner of behavioral economics, Vernon Smith, an individual’s emotional state rather than reason is the driving factor in influencing one’s choices. He writes,
People like to believe that good decisionmaking is a consequence of the use of reason, and that any influence that the emotions might have is antithetical to good decisions. What is not appreciated by Mises and others who similarly rely on the primacy of reason in the theory of choice is the constructive role that the emotions play in human action.
However, without ascertaining, by means of reason, the nature of reality, individuals will have difficulties in interpreting any fact. By relying on emotions rather than reason in the making of choices, individuals run the risk of endangering their lives. According to Ayn Rand, emotions are not the valid means to ascertain the facts of reality:
An emotion as such tells you nothing about reality, beyond the fact that something makes you feel something. Without a ruthlessly honest commitment to introspection—to the conceptual identification of your inner states—you will not discover what you feel, what arouses the feeling, and whether your feeling is an appropriate response to the facts of reality, or a mistaken response, or a vicious illusion produced by years of self-deception. . .
By means of reason, an individual can establish the suitability of a good to fulfill an end. Reason therefore is an individual’s means of survival. On the other hand, according to behavioral economics, the key driver of individuals’ choices is emotions. According to behavioral economics, whether individuals are generally patient or impatient determines whether they are inclined to spend or save today.
Behavioral economists also emphasize the importance of personality. An emphatic person is regarded as more likely to make altruistic choices. Impulsive people are more likely to be impatient and not so good at saving up for their retirement. Venturesome people are more likely to take risks—they will be more likely to gamble.
Obviously once the importance of reason is dismissed, what is then left is treating human beings like objects. According to this way of thinking, human action is driven by outside factors that influence individuals. By means of a given stimulus, one could observe various individuals’ responses and draw all sorts of conclusions regarding the world of economics. However, Ludwig von Mises argued that,
It is impossible to describe any human action if one does not refer to the meaning the actor sees in the stimulus as well as in the end his response is aiming at.
Causality emanates from human beings’ and not from outside factors. Behavioral economics was introduced in the field of economics because of dissatisfaction with the mainstream theory regarding consumer choices. In mainstream theory, individuals are presented as if a scale of preferences is hard-wired in their heads. The scale of preferences remains unchanged.
Contrary to the mainstream framework, Murray Rothbard held that valuations do not exist apart of the subjective appraisement of the valuer. Whenever an individual is confronted with a good, he assesses it in accordance with reference to his goals. These benefits can vary given changes in an individual’s circumstances. From this it follows that an unchanged scale of preferences does not match reality.
Obviously, human beings do change their minds, so it is not surprising that the behavioral economics practitioners have “discovered” that human behavior systematically deviates from the one depicted by mainstream economics. Rather than dismissing the assumption of unchanged preferences, behavioral economics has retained this assumption and has only modified the mathematical formulation of consumer’s preferences—labeled the utility function—supposedly in order to bring more realism to the mainstream model.
Since reason is not the key driver of individuals’ choices according to behavioral economics, individuals’ evaluations of goods are arbitrary. In the behavioral economics framework individuals make choices without reference to the purpose those goods will serve.
The Mises Framework of Consumer Choices
Following Mises, we can ascertain the distinguishing characteristic and the meaning of human action. For instance, one can observe that individuals are engaged in a variety of activities. Thus, they may be performing manual work, driving cars, or dining in restaurants. The distinguishing characteristic of these activities is that these activities are purposeful. Further, to use means in order to reach an end implies that individuals have to do it consciously. Hence, we can also establish that human actions are not only purposeful but also conscious.
The behavioral economist, Vernon Smith, rejects the view that human actions are conscious and purposeful. Thus, he wrote,
He [Mises] wants to claim that human action is consciously purposeful. But this is not a necessary condition for his system. Markets are out there doing their thing whether or not the mainspring of human action involves self-aware deliberative choice.
He vastly understates the operation of unconscious mental processes. Most of what we know we do not remember learning, nor is the learning process accessible to our conscious experience—the mind. . . . Even important decision problems we face are processed by the brain below conscious accessibility.
Following Mises’s framework, anyone who objects that human action is conscious and purposeful contradicts himself. The objector consciously and purposefully argues that human actions are not conscious and purposeful.
Conscious purposeful action implies that individuals assess or evaluate various means at their disposal against various ends. Individuals’ ends set the standard for valuations and, thus, their choices. By choosing a particular end, an individual also sets a standard of evaluating various means.
If my goal is to provide a good education for my child, then I will explore various educational institutions and will grade them in accordance with the information regarding the quality of education that these institutions are providing. Observe that the standard of grading these institutions is the end, which is to provide my child with a good education.
This must be contrasted with the mainstream framework where individual choices are determined by unrealistic preference scales. No reason is provided as to why the preference scale has selected a particular end versus another end.
Conclusion
By casting doubt that reason is the main faculty that navigates human actions, behavioral economics emphasizes the importance of emotions. The practitioners of behavioral economics hold that individual conduct is not rational. Consequently, the practitioners may have unintentionally laid the foundation for the introduction of government controls to “protect” individuals from their own irrational behavior.
