Make policy for real, not ideal, humans

Martin Wolf at the Financial Times: “Out of the crooked timber of humanity, no straight thing was ever made. This famous remark of the German philosopher, Immanuel Kant, is particularly relevant to economists. “Homo economicus” is far-sighted, rational and self-interested. Real human beings are none of these things. We are bundles of emotions, not calculating machines. This matters

The World Bank’s latest World Development Report examines this territory. It notes that “behavioural economics” alters our view of human behaviour in three ways: first, most of our thinking is not deliberative, but automatic; second, it is socially conditioned; and, third, it is shaped by inaccurate mental models.

The Nobel laureate, Daniel Kahneman, explored the idea that we think in two different ways in his 2011 book Thinking, Fast and Slow . The need for an automatic system is evident. Our ancestors did not have the time to work out answers to life’s challenges from first principles. They acquired automatic responses and a cultural predisposition towards rules of thumb. We inherited both these traits. Thus, we are influenced by how a problem is framed.

Another characteristic is “confirmation bias” — the tendency to interpret new information as support for pre-existing beliefs. We also suffer from loss aversion, fierce resistance to losing what one already has. For our ancestors, on the margin of survival, that made sense.
The fact that humans are intensely social is clear. Even the idea that we are autonomous is itself socially conditioned. We are also far from solely self-interested. A bad consequence of the power of norms is that societies may be stuck in destructive patterns of behaviour. Nepotism and corruption are examples. If they are entrenched, it may be difficult (or dangerous) for individuals not to participate. But social norms can also be valuable. Trust is a valuable norm. It rests on one of humanity’s strongest behaviours: conditional co-operation. People will punish free-riders even when it costs them to do so. This trait strengthens groups and so must raise members’ ability to survive.
Mental models are essential. Some seem to be inbuilt; and some can be damaging — as well as productive. Ideas about “us” and “them”, reinforced by social norms, may well lead to results that range from the merely unfair to the catastrophic. Equally important may be mental models that create self-fulfilling expectations of who will succeed and who will fail. There is evidence, notes the WDR, that mental models rooted in history may shape people’s view of the world for centuries: caste is an example. Such mental models survive because they are reproduced socially and become part of the automatic rather than the deliberative system. They influence not just our perceptions of others, but perceptions of ourselves.
To illustrate the relevance of these realities, the report analyses the policy challenges of poverty, early childhood development, household finance, productivity, health and climate change….(More)”