For the past 25 years, I have listened to annoying, unimaginative commercials on ESPN Radio. The most puzzling ads are those that exhort people to change careers or enter training because of “today’s economy.”
Obviously, the pitch is based on the idea that “today’s economy” is in shambles, and we all need to protect ourselves from the horrors wrought upon us from the idiot politicians in charge.
The only problem is logic tells us the economy has not ALWAYS been bad for that long. Over the past quarter century, our economy has had highs and lows for the middle class. There have been five different administrations in the White House over that time.
Of course, people always say when their side is in power, the economy is “better.” However, the commercials never change.
Aside from the fact that an incredibly small percentage of people actually know what economic numbers mean, that doesn’t stop them from assigning emotional attachment to them and basing their views about the well-being of the “economy” on those numbers.
This is why advertisers always scare consumers with “the economy today,” using the tone of a wise, disappointed grandfather with an MBA. There is a very easy explanation for this phenomenon.
Welcome to behavioral economics, the field that asks a simple question: Why do otherwise intelligent people make decisions that are definitely not logical?
For generations, economists viewed people as cool-headed calculators. (You know- rational) Give them the facts, the prices, and the choices, and they would carefully weigh the options before selecting whatever provided the greatest benefit at the lowest cost. It made for elegant theories, tidy graphs, and mathematical models that fit neatly into textbooks.
Then real people showed up.
Instead of behaving like rational machines, they bought lottery tickets despite impossible odds, paid extra for “limited-time offers” they didn’t need, refused to sell stocks that were losing money, and happily drove to Morgantown to save $5 on a $20 purchase.
However, behavioral economists don’t dismiss people as simply irrational. They propose something far more complex. They argue, we are emotional, social creatures whose decisions are influenced by habits, biases, fears, confidence, memories, and even how choices are presented to us. (You know – irrational stuff)
Behavioral economics sits at the intersection of economics and psychology. Rather than assuming people always maximize their financial interests, it studies how they actually make decisions in everyday life.
The roots of the discipline gained momentum during the 1970s when psychologists began demonstrating that people consistently rely on mental shortcuts when making decisions. These shortcuts help us navigate a complicated world, but they also lead to predictable mistakes.
These works challenged decades of traditional economic thinking and eventually earned some guy a Nobel Prize in Economics in 2002. Another researcher’s work on how choices are presented encouraged better decisions without taking away freedom earned him the Nobel Prize in 2017.
Today, behavioral economics influences almost everything in our daily lives – public policy, marketing, finance, healthcare, etc.
Proponents like to argue that Traditional Economics isn’t “wrong”. It’s simply built on assumptions that don’t always match real life. Its central character is the perfectly rational decision-maker. This fictional shopper carefully compares every option, calculates every cost and benefit, and ignores emotions.
If gasoline becomes more expensive, people buy less. If interest rates rise, borrowing falls. If prices increase, demand decreases. Simple. Predictable. Elegant. Although many of these relationships hold true over the long run and remain essential to understanding markets, the challenge comes when real human behavior refuses to cooperate.
These traditional assumptions are becoming more and more untethered from reality as the partisan divide in America colors every aspect of our daily lives.
In addition to the political biases inherent in our culture, traditional elements like sneaky advertisers and human nature make economics more art than science.
Imagine two grocery stores. One advertises “Buy Two, Get One Free.” The other simply lowers the price by one-third. Mathematically, they’re almost identical. Yet shoppers overwhelmingly prefer the first option because it feels like they’re getting something extra.
Or consider restaurant menus. Many include one outrageously expensive steak—not because they expect to sell many of them, but because it suddenly makes the second-most expensive entrée look like a bargain. That’s called the “decoy effect.”
Then there’s loss aversion. Most people dislike losing $100 far more than they enjoy finding $100. Psychologically, losses hurt roughly twice as much as equivalent gains feel good. This explains why investors stubbornly hang onto losing stocks while selling winners too soon. They’re trying to avoid admitting defeat or that they were wrong about something.
One of behavioral economics’ greatest discoveries is that presentation matters. Suppose a doctor says a surgery has a 90 percent survival rate. Most patients feel encouraged. Now suppose the doctor says the same surgery has a 10 percent mortality rate. The statistics are identical. The emotional reaction isn’t.
Nothing captures human psychology quite like the word “free.” Studies have found removing even a tiny cost dramatically changes decision-making because “free” eliminates the possibility of regret. As an English teacher, my biggest pet peeve by far was the use of the tautology – “Free Gift.” Obviously, a GIFT IS FREE, or it wouldn’t be a gift, but advertisers take advantage of our illogical impulses.
Behavioral economics has become even more relevant during the past ten years. Many traditional economic relationships have not followed the predictable patterns.
Inflation reached levels not seen in decades, yet consumers continued spending robustly. Interest rates climbed, but parts of the economy remained more resilient than forecasts predicted. Housing prices stayed elevated despite much higher mortgage rates. Companies found customers willing to pay premium prices even while surveys showed widespread concern about the economy.
None of that means traditional economics stopped working. Rather, it highlighted that economic decisions are shaped by more than income, prices, and interest rates alone.
After all, if human behavior were perfectly rational, there would be no impulse-buy aisle at the grocery store, no gyms packed every January, and no one would ever convince themselves that buying a gadget they didn’t know existed five minutes ago was somehow “saving money.”
Ultimately, the numbers alone don’t tell the whole story. James Carville famously instructed the Clinton campaign staff, “It’s the economy, Stupid.”
In reality, “It’s what the people think the economy is, Stupid.”
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