Win a signed copy of the book Basic Instincts

06-08-2008 16:57

AUTHOR Q&A: BASIC INSTINCTS

1. What is the central argument of your book?

A revolution has begun in economic thought. For generations economists have assumed that people’s behaviour can, at least approximately, be considered to be independent, selfish and rational. Behavioural economics has now shown, initially through laboratory experiments and increasingly via studies in the real world, that these assumptions are systematically wrong. The evidence is convincing and the implications, while uncertain at present, are likely to be profound.

2. Tell us something about your background and what made you write Basic Instincts?

My initial training (and PhD) is in neuroscience, but I left academia to become a journalist with the BBC. There, I got sick of losing arguments to economic journalists, so I decided to learn their secrets and to self-fund a postgraduate degree in economics. It was an eye-opener. To anyone with a background in a life science, the assumptions of traditional economics look utterly implausible. There were times when I almost giggled aloud in lectures because a very knowledgeable and intelligent person was standing before me making assertions about human nature that were comically naive. I looked for alternative approaches and was delighted to discover a group of clever researchers studying economic behaviour instead of making unworldly assumptions about it. The science they were doing was imaginative, entertainingly revealing about human nature and very important. Yet hardly anyone seemed to know about it. So I wrote Basic Instincts.

3. Recently, there seems to have been a great deal of general interest in economics, with books like Freakonomics becoming bestsellers. Where does Basic Instincts fit into this, and how do you hope it will help people to understand the world we live in?

The recent success of popular economics books is great for public understanding and for my profession, which despite studying some of the most fascinating questions you could ask has managed to make itself dull. However, I don’t subscribe to the claims made by many popular economics books and Basic Instincts is partly intended as an antidote. The idea that economists can reveal “the hidden side of everything” or that economics “explains nearly everything” is plain wrong – a ideological fiction used to sell books. Actually, our economic understanding is very limited, as our inability to predict economic events shows. The findings of behavioural economics illuminate some of the reasons why. People are much more sophisticated and subtle than economists assume and I hope Basic Instincts reveals how.

4. What really motivates the average consumer? When you go shopping, what goes on inside your head when you are choosing between one white shirt and another?

We want value for money and we look out for our own self-interest, so price and quality matter, as economists have always known. But two other big drivers of consumer behaviour stand out. Firstly, we care about who we do business with. We judge the companies we buy from and the brands we choose just as we judge people in general. How they treat us, how they treat others and what they say matters. Secondly, the common idea that we consumers know what we want is completely wrong. We are actually very uncertain about what things are worth to us. We frequently get it wrong, buying some things that turn out to be a waste of money and others that turn into treasured possessions. We are unsure which white shirt will languish in the back of the wardrobe and which will become our favourite lucky shirt for interviews and big presentations. Because we consumers are so uncertain, we can be manipulated. Marketing is therefore a powerful and frequently malign influence. Brand managers spend over forty hours a week thinking up ways to influence decisions we may take in forty seconds. But we also know that we are uncertain, so we tend to stick with what is familiar and we become cautious when buying new products or dealing with companies we don’t know. Arguably, this doesn’t matter much when buying shirts. But with pensions, homes and financial services, or in various markets for education and health, how we buyers cope in the face of uncertainty is vital to our future wellbeing.

5. Is economics about to be revolutionised? Your book seems to present a challenge to the prevailing economic wisdom.

Yes. The progress of behavioural economics has followed the classic pattern of a scientific revolution. It began with a few results that didn’t fit with orthodox theory. Most economists remained unaware of them (very many economists still don’t know the main findings of behavioural economics) and those that came across them mostly considered the results to be curious anomalies of little importance. As the number of troublesome findings grew, more and more researchers started to take them seriously. Many have now become convinced that standard theory is seriously flawed. These converts tend to be younger, have often had exposure to other disciplines and so bring new ideas. The bulk of the profession still remains hostile to abandoning the cherished standard theories of economics, but the truth is that they are refuted – not wrong, as such, but biased and rather sloppy approximations of reality, on which we can improve. Many fine minds are now looking for simple theories of high explanatory power to match our real economic behaviour. This work may take years, but I expect big breakthroughs within a decade or two, with potentially large implications. Of course, I could be wrong.

6. What is the most interesting part of the book for you?

The role of evolution. Our economic instincts appear to be very strong and people have conducted mutually beneficial exchanges with each other for thousands of generations - easily long enough for evolved traits to matter. The possibility that evolutionary adaptations underlie some of our economic behaviour is a theme throughout the book. For instance, I am confident that the ‘endowment effect’ (people instinctively value something they own much more highly than something they do not, even when it is the same object) is caused by an evolved mechanism that has served us well in the past. This raises the issue of whether such instincts remain helpful in a modern market economy or whether they lead us to behave irrationally. For me, this is one of the biggest unresolved questions in behavioural economics and an utterly fascinating one.

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