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Do Human Emotions Better Help Us Understand Economic Analysis?

According to behavioral economics (BE), emotions play an important role in an individual’s decision-making process. For example, if consumers become more optimistic regarding the future, then this is going to send a message to businesses regarding investment decisions. According to BE followers, whether consumers are generally patient or impatient determines whether or not they are inclined to spend or save today.

Behavioral economists emphasize the importance of personality. An emphatic person is regarded more likely to make altruistic choices. Impulsive people are more likely to be impatient and not so good at saving up for their retirement. Venturesome people are more likely to take risks—they will be more likely to gamble.

If emotions are an important factor in the decision-making process, then by means of emotions one can figure out the facts of reality. However, can individuals ascertain the facts of reality by means of emotions? According to Ayn Rand, emotions are not the tools of cognition:

An emotion as such tells you nothing about reality, beyond the fact that something makes you feel something. Without a ruthlessly honest commitment to introspection—to the conceptual identification of your inner states—you will not discover what you feel, what arouses the feeling, and whether your feeling is an appropriate response to the facts of reality, or a mistaken response, or a vicious illusion produced by years of self-deception.

Goods that support and enhance one’s life are discovered by reason. Once individuals have established that a particular tool is likely to improve their lives, they must figure out how to produce it, which is done by means of reason, not emotions. By means of reason man can establish the relationship between goods and their suitability to sustain life, and people who rely on emotions in their decision-making rather than reason endanger their lives.

By using experiments, the practitioners of BE conclude that individuals do not always behave rationally, although what they have discovered has nothing to do with real-life human beings. This conclusion is derived by comparing the outcome of the BE experiments to the mainstream economic theory. According to such theory, individuals’ preferences are constant and never change. They are like machines that never change their minds, which means a human robot is portrayed by mainstream economics as the pinnacle of rational behavior.

Obviously, people do change their minds, so it is not surprising that BE practitioners have discovered that real-life individual behavior systematically deviates from the human robot as depicted by mainstream economics. Note that psychology is an important factor in BE on the ground that human action and psychology are interrelated disciplines. However, there is a distinct difference between economics and psychology.

Psychology deals with the content of ends and values. Economics, however, starts with the premise that individuals are pursuing purposeful conduct. It does not deal with a particular content of various ends. According to Murray Rothbard, “A man’s ends may be ‘egoistic’ or ‘altruistic,’ ‘refined’ or ‘vulgar.’ They may emphasize the enjoyment of ‘material goods’ and comforts, or they may stress the ascetic life. Economics is not concerned with their content, and its laws apply regardless of the nature of these ends.”

Whereas “psychology and ethics deal with the content of human ends; they ask, why does the man choose such and such ends, or what ends should men value?”

Economics deals with any given end and with the formal implications of the fact that man has ends and utilizes means to attain these ends. Consequently, economics is a separate discipline from psychology.

Contrary to mainstream thinking, both Ludwig von Mises and Rothbard held that valuations do not exist by themselves (valuation scale) regardless of the things to be valued. On this Rothbard wrote, “There can be no valuation without things to be valued.” Valuation is the outcome of the mind’s valuing things. It is a relation between the mind and things.

The Misesian Framework of Consumer Choices

According to the Misesian framework called praxeology, individuals operate according to means and ends; they use various means to secure ends. We can also establish that actions are conscious and purposeful. However, BE economists such as Vernon Smith reject the view that human action is conscious and purposeful.

The objection that human action is conscious and purposeful, however, contradicts the one who objects, engaging in purposeful and conscious action to argue that human actions are not conscious and purposeful. Conclusions derived from the knowledge that human action is conscious and purposeful are valid as well, implying that there is no need to subject them to laboratory tests as is done in BE. There is no need for empirical testing for something that is certain knowledge.

Means-Ends and Consumer Choices

Mainstream economic thinking assumes individuals operate with a scale of preferences hardwired in their heads. The valuation scale determines choices regarding goods and services.

Why do people assign importance to a particular good versus something else? Mainstream economics reduces the individual to a machine that automatically selects goods based on the valuation scale. We contrast this assumption with the Misesian framework of conscious and purposeful action where reason determines one’s valuations.

In the means-ends structure, people assess or evaluate means at their disposal against their ends, which set the standard for valuations and following choices. By choosing a particular end, an individual also establishes a standard for evaluating means in order to reach the end.

For instance, if my end is to provide a good education for my child, then I will explore educational institutions and will evaluate them according to information regarding the quality of education that these institutions are providing. Since one’s ends determine the valuations of means and choices, it follows that the same good will be valued differently by someone if that person’s ends change.

At any point in time, people have numerous ends that they would like to achieve. What limits the attainment of ends is the scarcity of means. Hence, once more means become available, a greater number of ends, or goals, can be accommodated, which means living standards will increase.

Furthermore, once it is accepted that human actions are conscious and purposeful, it does not make sense to use a laboratory or questionnaires to determine people’s preferences. Thus, results obtained by those methods do not advance our understanding of human action as far as economics is concerned but instead prevent us acquiring any meaningful economic knowledge.

Conclusion

By casting doubt on the notion that reason is the main faculty that navigates human actions, BE emphasizes the importance of emotions as the key driving factor of human actions. We suggest that emotions are not tools of cognition and, thus, are not appropriate for understanding praxeology as it applies to economic analysis.

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