“You find out life’s this game of inches. And so is football. Because in either game, life or football, the margin for error is so small. I mean…one half a step too late or too early and you don’t quite make it. One half second too slow too fast, you don’t quite catch it. The inches we need are everywhere around us.
They are in every break of the game, every minute, every second. On this team, we fight for that inch. On this team, we tear ourselves and everyone else around us to pieces for that inch. We claw with our fingernails for that inch. Because we know when we add up all those inches, that’s gonna make the…difference between winning and losing!”
-Al Pacino, Any Given Sunday
I’ll probably use this paragraph for more than just this post, as it is my favorite fake halftime football speech.
Yesterday, I briefly mentioned the relatively-new field of behavioral economics, and there happened to be some great articles regarding the issue. (I’ve included some great ones at the end)
For now, my goal is solely to explain how I view behavioral economics in the context of understanding our economic system.
While I was on a cross-country flight last week, I was fortunate enough to speak to a wise gentleman in the medical profession whom I noticed happened to be holding Daniel Kahneman’s seminal book on the issue of behavioral economics: Thinking: Fast and Slow. Kahneman won the 2002 Nobel Prize in Economics, despite being a psychologist.
I have never read this more-recent book, but I am quite familiar with behavioral economics. As I explained to the gentleman who asked me what the premise of the long book was, it essentially describes why and how humans’ behavior differs from the “rational” behavior assumed in traditional economic theory.
These differences are often referred to as biases and are the main roadblock between society being how it should be, rather than how it is. The great thing about these biases, though, is that while they are philosophically reminiscent of Homer’s Sirens in The Odyssey, they are easier to conquer than what Odysseus had to deal with. (I didn’t say they were easy, just easier)
In fact, I’d posit that being aware of them is the key. Having the courage to not let one’s subconscious avoid considering unpleasant issues which lead to the biases and, rather, to acknowledge in one’s conscious mind that they exist, is crucial.
Although I have always enjoyed the phrase from G.I. Joe that “Knowing is Half the Battle” I’d say, in this case, it is more like most of the battle.
One does need to understand economic theory to behave optimally. But one also needs to understand how humans generally behave in order to understand why current economic theory is often not representative of reality.
Once one has these two guideposts, the rest is just about moving those inches…