The Story of Economics 'Monsters'
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What is the main topic discussed in this episode?
Thank you for watching.
Allow me to introduce myself.
How does the episode introduce Homo economicus and its caricatured shopping behaviour?
I am Economic Man, or Homo Economica, straight from the economics textbook and out for a spot of shopping. So I have what economists call my very own scale of preferences. Here's the list. And given the price, in light of my resources, I aim to maximise my utility. And since I'm rational, really I am, I calculate, that'll be 47 over x minus a percent. My individual self-interest is best served by, um, that one. Packet of cheese and onion. Thank you. Thank you. Now, that's a bit of a caricature of what it means to be economic man, and it's hotly debated. In fact, like Shakespeare's Hamlet, economics is riven by two views of what it is to be human. Noble in reason or at the mercy of unruly human impulse.
What evidence do primates and evolutionary psychology give about limits to human economic reasoning?
Gluttonous lack of self-control, for example. In this series, we heard first about economics as a story of morality. Then we heard the story of economics as science. This week, it's economics as the story of people, how they think and behave. And we'll do this with a set of intriguing questions about whether you and I are all that Homo economicus describes. Here goes. First, is my or your economic judgment as sound as we probably both like to think – Earlier in the series, we met the economist Paul Seabright at the zoo to compare people with other primates. Time for a return visit.
The modern financial system was built by large-brained apes that evolved on the African woodland savannah somewhere between 7 million years ago and today. If you think about how those apes lived for almost all of their life, they lived in small bands. They were very suspicious of strangers. They didn't have anything to do with large animals. towns, villages, cities, certainly none of them would have known how to react to Wall Street. Yet these apes, at the very, very latest part of their social life, decided to build modern civilisations and, in particular, to build spectacularly complex financial systems. It's not surprising that the psychology which those apes brought to the task was not quite up to the job of managing a system as complex as the financial system we now have.
So if you want to take a concrete example, we know that social primates in general and human beings in particular are good at what you might call strategic reasoning. That's to say, when I think of you not just as an arbitrary blob in my environment that sort of moves in certain ways and that might or might not be threatening to me, but as somebody rather like me with intentions and... preferences and desires and fears whose behavior i can therefore anticipate by modeling you as a conscious thinking willing agent now that's strategic reasoning but of course when we're not just friends but rivals for something it becomes important to anticipate what you're doing and to anticipate it better than you anticipate what i'm doing
Now, human beings are very good at that, but we're not as good as we like to think we are. And the modern financial system depended to a terrible extent on individuals thinking that they could out-reason others.
How can herd behaviour and social influence create market booms and busts?
So how many people did you know bought houses in London and the home counties in the last few years and thought very cleverly that even if prices couldn't go on rising forever, they would be able to sell the houses and get out of the bubble before the bubble burst?
Feel flattered by that? Me neither. There we go, priding ourselves on our judgment, and Paul says we're deluded. Were you? Which brings our next behavioural question. When I buy, is it really between me, the price, and the product? Or am I heavily steered by you? By envy, maybe, of your new phone because everyone has one? Or fear, buying this, doing that, because everyone else does? Think of the best-selling Christmas toy, which it will be is a tough call, but then one edge is ahead and is named the must-have. At which point, well, they sell out, because the manufacturer didn't see the rush coming either. People decide their wants when they see what others want. So who really sets my preferences?
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Chapters
8 chapters
1
What is the main topic discussed in this episode?
0:01–0:32
2
How does the episode introduce Homo economicus and its caricatured shopping behaviour?
0:32–1:37
3
What evidence do primates and evolutionary psychology give about limits to human economic reasoning?
1:37–4:10
4
How can herd behaviour and social influence create market booms and busts?
4:10–7:20
5
What experiments reveal about time-inconsistent choices and our apparent irrationality?
7:20–9:57
6
How did Keynes' 'animal spirits' concept change how we think about economic mood swings?
9:57–15:42
7
How do cultural institutions and social rules shape everyday economic decisions (the pub example)?
15:42–20:19
8
Can 'rational' models explain addiction, crime and saving — what do behavioural economists propose?
20:19–28:10