Question

Briefly describe Evolutionary Psychology and then discuss its contributions to Behavioral Economics

Answer 1

Economics and Evolutionary Psychology

by David Friedman

Economics is built on a simple assumption—that individual behavior can best be predicted by assuming that each individual will take the actions that best achieve his objectives. The justification for that assumption, somewhat misleadingly labeled “rationality,” is that we have no good theory of mistakes, no way of predicting what particular irrational action an individual will take. That leaves the rational element as the best—although imperfect—way of predicting behavior.
Evolutionary psychology offers, among other things, a theory of mistakes—an alternative to the rationality assumption. In this essay I sketch out the nature of that theory, describe some puzzles that economics has a difficult time explaining, and try to show how modifying economics with the aid of evolutionary psychology might help explain them.

Evolutionary Psychology: The Short Version

Evolutionary psychology^[2] starts from two simple assumptions:

The human mind is best understood not as a general purpose computer but as a set of specialized software modules, each designed to deal with a particular subset of problems.

Those programs have been designed by Darwinian evolution to produce reproductive success in our environment of evolutionary adaptiveness—the hunter-gatherer environment in which our species spent most of its species history.

Researchers in evolutionary psychology, starting with these assumptions, have generated and tested predictions ranging from differences in male and female special abilities to the timing of morning sickness.
Three important points are worth making about the second assumption in order to avoid misunderstanding. The first is that the assumption is not that individuals seek reproductive success—if we were doing that, the population of developed countries would be increasing much faster than it is—but only that we have those psychological characteristics that produced reproductive success in the environment we evolved in. The second is that reproductive success is an objective for the individual, not the group or species. Most scholars in evolutionary biology accept the view that traits which benefit group or species at the cost of the individual who carries them will be selected out.
The third point is that we are adapted not to the world we now live in but to the environment in which our species spent most of its history. Agriculture is a recent development. We would expect most of our characteristics to be designed to produce reproductive success in the environment in which our species spent most of its evolutionary history—believed to be an environment of small hunter-gatherer bands.

What is Behavioral Economics

Behavioral Economics is the study of psychology as it relates to the economic decision-making processes of individuals and institutions. The two most important questions in this field are:

1. Are economists' assumptions of utility or profit maximization good approximations of real people's behavior?

2. Do individuals maximize subjective expected utility?

Behavioral economics is often related with normative economics.

BREAKING DOWN Behavioral Economics

In an ideal world, people would always make optimal decisions that provide them with the greatest benefit and satisfaction. In economics, rational choice theory states that when humans are presented with various options under the conditions of scarcity, they would choose the option that maximizes their individual satisfaction. This theory assumes that people, given their preferences and constraints, are capable of making rational decisions by effectively weighing the costs and benefits of each option available to them. The final decision made will be the best choice for the individual. The rational person has self-control and is unmoved by emotions and external factors and, hence, knows what is best for himself. Alas behavioral economics explains that humans are not rational and are incapable of making good decisions.

Behavioral economics draws on psychology and economics to explore why people sometimes make irrational decisions, and why and how their behavior does not follow the predictions of economic models. Decisions such as how much to pay for a cup of coffee, whether to go to graduate school, whether to pursue a healthy lifestyle, how much to contribute towards retirement, etc. are the sorts of decisions that most people make at some point in their lives. Behavioral economics seeks to explain why an individual decided to go for choice A, instead of choice B.

Because humans are emotional and easily distracted beings, they make decisions that are not in their self-interest. For example, according to the rational choice theory, if Charles wants to lose weight and is equipped with information about the number of calories available in each edible product, he will opt only for the food products with minimal calories. Behavioral economics states that even if Charles wants to lose weight and sets his mind on eating healthy food going forward, his end behavior will be subject to cognitive bias, emotions, and social influences. If a commercial on TV advertises a brand of ice cream at an attractive price and quotes that all human beings need 2,000 calories a day to function effectively after all, the mouth-watering ice cream image, price, and seemingly valid statistics may lead Charles to fall into the sweet temptation and fall out of the weight loss bandwagon, showing his lack of self-control.