The emotional side of economics?

Picture borrowed from here

Last week it was announced that Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel is awarded to Richard H. Thaler for his work on integrating economics with psychology. This with the motivation that he has:

“… incorporated psychologically realistic assumptions into analyses of economic decision-making. By exploring the consequences of limited rationality, social preferences, and lack of self-control, he has shown how these human traits systematically affect individual decisions as well as market outcomes.”

In one of his applied works in his research on lack of self-control Thaler demonstrated how nudging may help people exercise better self-control when saving for a pension, as well in other contexts. Nudging is a term coined by Thaler, and is defined as a concept that proposes positive reinforcement and indirect suggestions to try to achieve non-forced compliance to influence the motives, incentives and decision making of groups and individuals.

I think this award winner is really interesting for the field of Business & Design to look at especially in connection with the earlier laurate Daniel Kahneman that received the same prize in 2002 (shared with Vernon Smith). Kahnemans work is described as

“Kahneman’s main findings concern decision-making under uncertainty, where he has demonstrated how human decisions may systematically depart from those predicted by standard economic theory. Together with Amos Tversky (deceased in 1996), he has formulated prospect theory as an alternative, that better accounts for observed behavior. Kahneman has also discovered how human judgment may take heuristic shortcuts that systematically depart from basic principles of probability.”

Kahneman work is known by those of us who are not hard-core economists from his book “Thinking fast and slow”, where he describes the brain as consisting of two systems, where System 1 is fast, intuitive, and emotional and System 2 is slower, more deliberative and more logical. In a recent interview on the podcast “On Being” Daniel Kahneman gave an example on how his research has shown that our impression of an experience affects our decision making, this by referring to an experiment where the participants got to hold their hand in two different containers (although not at the same time). In one container the water was very cold and the participant had to hold the hand in the water for 60 seconds. In the other container the water was as cold and the participant had to hold its hand in the water for 60 seconds with an additional 30 seconds, but during those seconds the temperature of the water rose with 1 degree Celsius. When asked which experience the participant would like to repeat again most participants answered the 90 sec experience. If we look upon this as an experience of pain then 90 seconds is logically worse than 60 seconds. But people doesn’t store experience in such a way, instead they form an impression around the experience they’ve had. And because of the 90 sec experiment ended with the sensation of the pain being diminishing (the end being better than the start) it became the one that people was more inclined towards choosing as less painful.

What I find particularly interesting in the work of Khaneman and Thaler is its connection to human experience, to emotion. Because the digger I deep within the discipline of experience design, the more I can see how our emotions is a significant part of us as persons, and that it has an important part to play in our decision making. Still it is the most challenging part to map out in for example a costumer journey since it is so fleeting as well as highly personal.

And then comes the question on how should we even work with this? In a “post-truth” era objective facts are less influential in shaping public opinion than appeals to emotion and personal belief, are we then contributing to this kind of society when trying to tap into people’s emotional responses? Or is now the most important time to work with this to make sure that is not used as a dark force?

Ps, If you wan’t to listen to the podcast with Kahneman you can find it here

One clap, two clap, three clap, forty?

By clapping more or less, you can signal to us which stories really stand out.