By: Jaime Unda, psychologist, ETHOS BT researcher
Traditional economics assumes that human beings (Homo Economicus, as they would later be known in behavioral economics) make decisions based on our preferences, identifying the different options that the environment presents to us, assessing their consequences in terms of our tastes.
These decisions are, in theory, entirely rational. Homo Economicus does not allow itself to be permeated by the “irrationality” of emotions, it knows exactly what is best for it and therefore we should not interfere with its path in any way, as the economist Hartmut Kliemt clearly states. Based on this understanding, consumption models in countries and organizations were and are defined, predictions are made and public policy and economic development decisions are made. Likewise, companies estimate their profits, develop advertising projects and design products with the aim of being more attractive and increasing their profits.
In 1979, Daniel Kahneman and Amos Tversky, two Israeli psychologists famous at the time for their research on human decision-making under environments of risk and uncertainty, created Prospect Theory, which would later give the former the Nobel Prize in economics. The theory was modified and improved in the early 90s and basically states the following:
This graph that talks about value shows how, according to the experiments carried out by these two psychologists, human beings are much more sensitive to losses than to gains, which is why the curve is much more prominent when it is on the lower side. In their experiments they showed, for example, how people are more willing to obtain a lower economic value but with complete certainty of receiving it, than a higher economic value but which is not completely assured.
Another approach to this graph is that in the loss part, the graph tends to be convex, and concave in the profit part. This implies that humans tend to feel more when the replacement loss or gain is 100 to 200, but when the change is 1,100 to 1,200, the sensitivity is reduced.
This is called “reduced sensitivity.” Likewise, and as one of the most relevant approaches of this theory, the fact that the graph is convex in the losses also has a fundamental implication: to the extent that the losses are greater, human beings will tend to look for more. risk, either to win a greater amount of money or to play the probability of losing less money.
This changes the traditional model, counteracting the idea of unlimited rationality (a concept that had already been criticized by the Nobel Prize winner in economics, Herbert Simon) and poses the human being as a being that contemplates different stimuli when making a decision. decision, even unconsciously.
The studies of Kahneman and Tversky, as well as many others who joined this research task, showed that it is necessary to rethink the way in which we make predictions , as well as the design of programs and projects within organizations, since whether public or private. Today, several governments around the world have established teams that focus on behavioral sciences, which take these discoveries into account to develop public policies closer to the citizen and that take into account the real cognitive characteristics of Homo Sapiens. The most famous of these, the Behavioral Insights Team, has contributed in the United Kingdom to the development of public policies from health to public transport.
References
Barberis, N. C. (2013). Thirty years of prospect theory in economics: A review and assessment. Journal of Economic Perspectives , 27 (1), 173-96.