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The Role of Beliefs in Economics

By: Sai Srihaas Potu

Despite significant advances in the science and technology of health care, a large gap separates the theoretically achievable impact of health care from what individuals desire from the system and in turn achieve. An analysis of human behavior can explain many of our health-related problems and goals which range from the acquisition of diseases to the fostering of wellness. In recent years, behavioral economics has offered new approaches to supplement many conventional approaches to improving health-related behaviors that rely on education or standard economic theory. Conventional methods assumed that an educated public will naturally make decisions in order to optimize their safety and welfare. However, behavioral economics has derived a new approach that brings forth existing and predictable patterns of behavior that often lead people to make choices against their best interests.


Psychologists, sociologists, and behavioral economists have recognized, for long, the influence that certain beliefs have on decision making. Experiments from psychology indicate that people have systematic biases. A perfect example of this is when people place bets on a race track. Recent evidence has shown that someone just leaving the betting window places much higher bets on a horse than someone in the queue just before placing a bet. Borrowing from these arenas of social inquiry, behavioral economists have tried to understand the role of beliefs in economic decision making.


The role of beliefs in economics has been emphasized in recent years primarily by behavioral economists, who have relied on advances in psychology. However, the idea that beliefs and sentiments shape how we live and transact is an old one that can be traced back to the writings of the father of economics, Adam Smith. In light of recent research, economists have been able to determine that three main channels can explain the endogenous belief dynamics we see in our society today.


The first is about avoiding bad news or any kind of information that could cause discomfort. Professors Benabou and Tirole label this as strategic ignorance. People, for this particular reason, choose not to test for HIV or other deadly diseases. Economist Emily Oster of Brown University collaborated with Ira Shoulson of Georgetown University and E. Ray Dorsey of the University of Rochester to test this issue. The trio looked into testing for a genetic disease known as Huntington disease, a hereditary neurological disorder, and found that many of those who are at greater risk of contracting Huntington disease refused to test.


The other way in which people misuse beliefs is by refusing to internalize any information that could cause distress, even when there are enough red flags. People simply opt for reality denial. For instance, in case of an impending housing bubble, many disregard warning signals and start showing signs of, to use Nobel laureate Robert Shiller’s phrase, “irrational exuberance”.


The third is about people selectively acting to feel good about themselves even though the action may cause some harm to them. In November 2011, New Zealand cricketer Martin Crowe announced a surprise comeback at the age of 48. The comeback lasted precisely three deliveries, with Crowe pulling a thigh muscle. This is a perfect example where self-signaling is to be blamed for this catastrophe.


Standard economic theories suggest that people learn from their mistakes, internalize new information, and become less prejudiced over time. The theory of motivated beliefs suggests that some beliefs may be more resilient to change. This theory shows us why we often make systematic errors: why we may sometimes refuse to test for a potentially life-threatening disease and why we may sometimes over-invest in markets.


So many of our conventional approaches to changing the culture of health involve, on some level, trying to convince people that a healthy life is their decision, and one they should choose. Changing the culture of health may not be easy, but we can advance the goal by modifying health plan designs and choice environments in systematic ways. This is will not only make it easier to pick the healthier choice, but it will enhance our thought process and allow us to look past our incorrect beliefs.


The development of behavioral economics has occasioned a shift in focus from assumptions of rationality to impulsive or irrational human behaviors. Behavioral economists look for stable intrinsic properties of the choosing agent. In conclusion, the conceptual framework of behavior analysis enables investigation of the selection of human choice behavior which will allow behavioral economists to better understand the effect of moral beliefs on economic decision making in our society.


References:

1. Amir O, Ariely D, Cooke A, Dunning D, Epley N, Koszegi B. Behavioral economics, psychology, and public policy. Marketing Letters. 2005.

2. DiClemente F., Hantula A. Applied behavioral economics and consumer choice and beliefs. Journal of Economic Psychology. 2003.

3. Emily Oster, Ira Shoulson, E. Ray Dorsey. Optimal Expectations and Limited Medical Testing: Evidence from Huntington Disease. The National Bureau of Economic Research. 2011.

4. Pager, Devah, Diana Karafin. Bayesian Bigot? Statistical Discrimination, Stereotypes, and Employer Decision Making. The American Academy of Political and Social Sciences. 2009.

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