The X Factor

Economists often talk as if money has a life of its own.  As Dan Ariely, a Duke University Professor, put it:  “The entire question of how emotion will change people’s behavior is pretty much outside the standard model of economics.”

Author of “The Upside of Irrationality,” Ariely adds:  “Pride is not in the model. Revenge is not in the model. Fear is not in the model. Even simple things like the disenchantment of people who are fired from their jobs — the model doesn’t account for how devastating that experience can be,” and what that sense of devastation will mean for the economy.  (See, “The X Factor of Economics: People.”)

Homo Economicus is presumed to be rational, self-interested and well informed.  Even economists know that not everyone is always like that.  But they get around that wrinkle by presuming that the irrational deviants cancel each other out.  The optimists balance out and neutralize the pessimists;  the alarmists make up for those who procrastinate.  What’s left are the level-headed ordinary folk who can calmly add, subtract and multiply without confusion or anxiety.

That’s a fantasy.  Moreover, it makes no allowance for the contagion of group process, the way in which people influence and are influenced by others.  When we have a bubble, such as led to the recent housing crisis, it’s clear that almost no one was clear headed and rational about the market.  A handful saw that prices were way out of line and could not be sustained, and they made a bundle.  But it wasn’t until prices actually declined – and then started to plummet – that most people got the message.

It seems clear now that the standard model of economics is deeply flawed.  It’s interesting to think about how it got as much credibility as it did in the first place, based on such a simple minded and inadequate psychology.  That, in itself, is a sign of how its acceptance was the result of group contagion, a kind of Groupthink that dismissed problems and questions along the way.  Essentially economists allowed themselves to believe what they wanted to believe.

It is unlikely it will be replaced by another standard model.  The psychology of human motivation is too complex and multi-faceted for that.   Behavioral Economists are now speaking up, and adding insights to the ordinary economic behavior of economic man, but that is just the beginning.  How will other, more dynamic psychological perspectives be heard, including ideas about human motivations that are outside awareness?  And how will the psychology of groups enter the dialogue?

Society is far too complex for any discipline to think it has a lock on understanding human behavior.  But, clearly, we don’t know enough about cooperation and dialogue across professions.