Maybe we needed to start thinking about human ability in a more humble way, and to acknowledge that lots of avoidable mistakes are being made on a regular basis. All of a sudden, there was a realization that the irrationalities we had been studying might be much more important - and prevalent - than people believed. That isn’t very nice to say, because so many people were hurt by it (myself included), but perhaps we can take some comfort in the fact that an emerging academic discipline derived some benefit from the crisis. This was indeed the best thing that has ever happened for Behavioural Economics.
In addition, we couldn’t get these hyper-rational beings to participate in our experiments, so we were left without any empirical answers: until the failure of the financial markets in 2008. There was no way to set up two versions of the market - one with rational people making decisions and one without. I never bought this argument: why would the human brain develop two different approaches to decisions that depend upon the importance of the decision? While I allowed that the market could possibly mitigate some irrational behaviour, I also felt that it could increase it.Īt the end of the day, we had all this evidence of human irrationality, but we could never really test how it plays out in the market. When we present our results, the ‘rational’ economists say, ‘These are very nice experiments that make for great dinner conversation but when it comes to professionals making decisions that involve money, irrationality simply doesn’t occur’. Please explain.įor years, my colleagues and I have been conducting experiments about human irrationality.
You have called Alan Greenspan’s admission to being ‘shocked’ by the failure of the financial system “an important step forward” for Behavioural Economics.
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