An enlightening (!) little section from David Brooks’ The Social Animal: The Hidden Sources of Love, Character, and Achievement concerning the difference between classical and behavioral economists. And although while describing the caricature of human nature put forward by classical economists, he may fall into caricature himself, the gist is sound. One guess as to which side we find more sympathetic/convincing:

The human being imagined by classical economics is smooth, brilliant, calm, and perpetually unastonished by events. He surveys the world with a series of uncannily accurate models in his head, anticipating what will come next. His memory is incredible; he is capable of holding a myriad of decision-making options in his mind, and of weighing the trade-offs involved in each one. He knows exactly what he wants and never flip-flops between two contradictory desires. He seeks to maximize his utility (whatever that is). His relationships are all contingent, contractual, and ephemeral. If one relationship is not helping him maximize his utility, then he trades up to another. He has perfect self-control and can restrain impulses that may prevent him from competing. He doesn’t get caught up in emotional contagions or groupthink, but makes his own decisions on the basis of incentives.

Classical economist readily concede that this sort of person doesn’t actually exist. But they argue that this caricature is close enough to reality to allow them to build models that accurately predict real human behavior. Moreover, the caricature allows them to build rigorous mathematical models, which are the measures of true genius in the economics profession. It allows them to turn economics from a soft squishy muddleheaded field like psychology into a hard, rigorous, and toughminded field like physics. It allows them to formulate laws that govern the study of behavior, and wield the mighty powers of numbers.

Behavioral economists argue that caricature is not accurate enough to produce reliable predictions about real events. Two psychologists, Daniel Kahneman and Amos Tversky were the pioneers… These scholars investigate cognition that happens below the level of awareness. Rationality is bounded by emotion. People have a great deal of trouble exercising self-control. They perceive the world in biased ways. They are profoundly influenced by context. They are prone to groupthink. Most of all, people discount the future; we allow present satisfaction to blot out future prosperity.

As Dan Ariely writes in his book Predictably Irrational, “If I were to distill one main lesson from the research described in this book, it is that we are pawns in a game whose forces we largely fail to comprehend. We usually think of ourselves as sitting in the driver’s seat, with ultimate control over the decisions we make and the direction our life takes; but, alas, this perception has more to do with our desires–with how we want to view ourselves–than with reality.”

Behavioral economists argue that stray intuitions, such as a sense of fairness, have powerful economic effects. Pay scales are not only set by what the market will bear. People demand salaries that seem fair, and managers have to take these moral intuitions into account when setting pay scales.

Behavioral economists look for the ways real human beings depart from the rational ideal. There is peer pressure, overconfidence, laziness and self-delusion. People sometimes take out extended warranties when they buy appliances even though these warranties almost never justify the cost. Health officials in New York thought that if they posted calorie information near the menu boards at fast-food restaurants, people might eat more healthily. In fact, diners actually ordered slightly more calories than before the law went into effect. (pg. 177-179)