Behavioral economics or economic psychology

Image: Plato Terentev


Exact, natural, social, human sciences and other forms of knowledge begin to seek multidisciplinary dialogue

In scientific methodology, there is a methodological duality between Exact Sciences, on the one hand, and Natural Sciences and Social Sciences, on the other. The deductive-rational method holds that the human mind is the originator of the knowledge process. The historical-inductive method suggests that the role of abstraction is to order the data of the lived experience, according to logical conceptual categories, in the sequence concrete-abstraction-concrete thought.

It is discussed whether these logical-conceptual categories are innate to the human mind, arising to the intellect a priori, independently of experience. This would be the case, for example, in mathematics.

This methodological individualism differs from the conception of society as an autonomous reality in relation to the individual, according to methodological holism. For him, the analysis of social phenomena has its starting point in social action.

Economic science is seen by supporters of the first method as the set of theories of the best individual decisions. The starting point of this microsociology would then be a theory of rational choice [rational choice] Macroeconomics would be a mere aggregation of these uniform choices, because they would be based on the same microeconomic fundamentals, guided by the best economic theory.

In the self-styled “mainstream” [mainstream], for example, in the Economy of Trust now predominant in orthodoxy, the analysis of the results of human action is made from this individualist perspective. The only valid economic theory would logically be derived from the basic principles of individual human action, according to the praxeology, that is, the study of the factors responsible for people achieving their purposes.

This method would allow the discovery of fundamental economic laws valid for all human action. It would seek the explanation of economic phenomena in the actions of individuals, and not in collective entities – institutions, unions, the State, etc. – as, for example, does historicism.

Orthodox economic thought rejects macroeconomic concepts and aggregates if they are not grounded in individual human action, the starting point for choice. Holism, whose etymology comes from the Greek holos (“whole” or “whole”), opposes this reductionism.

For methodological holism, adopted by economists classified by their opponents as heterodox, the properties of a system or organism cannot be explained only by the sum of its components. The complex system emerges from the interactions of its components and, in feedback, influences how the parts behave.

Since Aristotle, this line of thought observes the tendency of Nature (and Society), through creative evolution, to form or configure a “whole” distinct from the mere sum or aggregation of its parts. Both the natural and the social world are analyzed as an integrated whole or organism. The synthesis of the whole would prevail over the analysis of individual details. It would be more relevant to have an initial understanding of the whole of human existence so that, based on the analysis of this resultant, we can descend to the level of interactive decisions.

The complexity of a particular question or problem happens in all areas of knowledge. Today, with the experience of teaching the methods of economic analysis, I understand the ironic comment of the editor of the magazine where my first article was published in 1978.

As I used the concept of “coffee complex”, copied from the thesis of my late advisor – Professor Wilson Cano –, he told me: “the economy absorbs concepts from psychology”… I thought of the Oedipus Complex (unconscious desire to replace the father) and Inferiority Complex (feeling capable of making the person withdrawn or aggressive), but I confess I did not have enough knowledge at the time to think of other terms common to both, such as “life cycles”, “developmental crisis”, “depression” etc. .

As a passing time, later in my teaching and research career, I finally came across the call for behavioral economics economists, in particular, behavioral finance within my specialization. I discovered that psychologists call this area of ​​knowledge economic psychology.

Cognitive psychology's emphasis on mental processes brought the concepts of perception and judgment into the field of decision-making problem solving. Before, the perception of risk regarding an uncertain future in the economic-financial decision-making process was considered a statistical issue, for assessing the probability of success, instead of a psychological issue.

Daniel Kahneman and Amos Tversky reviewed theories about decision making in the face of uncertainty in the article Judgment under Uncertainty: Heuristics and Biases, published in 1974. They demonstrated that the widespread belief that people make rational decisions based on statistics and probabilities is not true.

On the contrary, they decide based on “rules of thumb”, commonplaces according to heuristic criteria based on concrete examples or small samples of experiences or cases. Heuristic is a simple mental procedure capable of helping to find any, even imperfect, answers to difficult questions. Therefore, many financial decisions tend to be inappropriate for the future context. They are based on easily accessible information rather than real probabilities.

The human being, self-classified as a rational animal, recurrently makes mistakes. For example, “the proof of repeating the same mistake is the second marriage”… This joke demonstrates that many decisions are taken by passion or emotion – and not by reason.

Kahneman and Tversky found: This problem-solving method, based on experience with a small or biased sample, follows a pattern. There is, for example, a tendency to overestimate the probabilities of something unlikely happening (a plane crash while the passenger is drinking) and to underestimate those of something more likely to happen (a traffic accident after the driver drinks alcohol). In fact, the vast majority of drivers consider themselves superior to others. This is proven even in research with them in the hospital area of ​​accident victims...

Conclusions of this type were the basis of the so-called prospect or prospect theory (“the expected”), presented by Kahneman and Tversky, in 1979. They developed the interdisciplinary area of ​​knowledge called “behavioral economics”.

Today, with more accessible knowledge via the internet of common methods from different areas of knowledge, the challenge is to organize transdisciplinary knowledge. Science is always in a continuous process of oscillation between division and unification: hybridization of sciences; methodological imports and exports between sciences; challenge of an interdisciplinary or multidisciplinary team to take on complex research subjects and conceive transdisciplinary theories – and teach them in innovative education.

Transdisciplinarity requires multi-levels, collaboration, cooperation and systemic coordination. The complexity, emerging from interactions between multiple components existing in reality and, therefore, crossing historically established professional boundaries, is an intellectual challenge for philosophy, epistemology, linguistics, pedagogy, mathematics, chemistry, physics, meteorology, statistics, biology , sociology, economics, politics, architecture, medicine, psychology and information technology.

The exact, natural, social, human sciences and other forms of knowledge are beginning to seek multidisciplinary dialogue. From then on, the circuit breaker-reducer paradigm is gradually overcome by multi, inter and transdisciplinary dialogues.

In this context of the history of science, complex thinking or the paradigm of complexity emerges. It aims to associate, if not merge, without separating the different disciplines and scientific contributions, as well as the different forms of knowledge from other instances of reality, such as the State, the market and the community, with this third party included as civil society.

Complex thinking questions all forms of dogmatic, unilaterally quantitative or instrumental thinking. Uncertainty is part of this new paradigm, as an opening of new perspectives, and not as a principle of methodological individualism that immobilizes thought.

This cognitive democracy aims to establish dialogue between the different areas of knowledge. This is the path of complex thinking, a path made in its own course, by continuously doing and rethinking itself.

In the new revised edition of personal finance booklet of my authorship as a didactic guide for the course offered by me, in the last year of graduation for IE-UNICAMP students, I use these concepts in Behavioral Finance. send it to download free: Fernando Nogueira da Costa – personal finance booklet - 2023

Financial Education is a necessity for everyone!

*Fernando Nogueira da Costa He is a full professor at the Institute of Economics at Unicamp. Author, among other books, of Support and enrichment network.

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