Economic Choices

Recently, I finished a book I had been reading off and on for a while. “The Economic Naturalist: In Search of Explanations for Everyday Enigmas” by Robert H. Frank provides a simple statement about how we make our choices in our lives. This statement is one in which I have, through the years, tried to explain to people when we get into economic discussions. For the first time, I have run across a succinct and profound statement which speaks right to the heart of the theory behind behavioral economic choices. “Virtually every feature of the built environment, virtually every feature of human and animal behavior, is the explicit or implicit result of the interplay of costs and benefits.” The important part of that statement is the relationship between behaviors and costs/benefits. People, when they hear the word economics, automatically assume we are talking about money. But that is far from the case.

Over the last few years, bookstore shelves have started to turn up a variety of books that fit the bill of “Behavioral Economics.” These new economists and theorists have begun to utilize the economic mindset to analyze society and the choices we make. During my college career in pursuit of my degree in economics, I realized the impact of economics in our day to day decision making. I am very happy to see this “behavioral” world being tapped and receiving support via book sales and websites. Probably the most well known book that was written in this genre is “Freakonomics” by Steven D. Levitt. His book and associated website have generated millions of readers and their thirst for knowledge has resulted in more economists mining the behavioral side of our world.

In reality, behavioral economics comes down to common sense. However, common sense sometimes evades the popular theory because we like to think everything is more complicated than it appears. There always has to be a convoluted reason for various actions to take place. It can’t be as simple as common sense, can it? For the most part, common sense is the key and behavioral economics displays that fact. I’ve always said, just like the statement from the book, that almost EVERY decision we make in our life is determined by the cost versus benefit rule. Usually, the cost/benefit revolves around money, but it doesn’t have to. Emotional pain, happiness, and other feelings can also be part of the cost/benefit analysis. Other things such as respect, power, and pride can be factors in choice making. Again, this is all common sense. But as I stated earlier, people just cannot seem to wrap their mind around decision making being so simple.

If you boil decision making down on any subject, the vast majority of your decisions will be made in a way that benefits your personal self more than what the costs are. The benefits may not even be readily visible to people on the outside looking in because only the person making the choice knows which factors created the greatest benefit in the equation. Happiness is worth more to some people than others when compared to money. Respect may mean more than power in an equation. Potential emotional pain may outweigh any potential monetary benefit. These are all unquantifiable factors on the outside, but the person making the decision places value on each. This is economic decision making at the core of how we proceed in our lives.

However, there are factors that come into play which throw the entire equation on its head. How can that be when we make decisions directly benefiting us more than costs? People have different versions of what benefit truly is. People who have strong religious beliefs or moral and ethical boundaries tend to make decisions that apparently cost them more than it benefits them in our physical world. These people are willing to sacrifice their individual benefits for a payoff in another form. They make decisions out of charity, faith, and belief they are doing the right things. They accept their decision and fully understand the cost/benefit analysis. However, upon further look, even these people are following the cost/benefit analysis. They are sacrificing something up front for a payoff in another form in the end. This payoff after the fact, is worth more to them than the immediate benefit of choosing a different path.

So, we are back to the statement from the book. He says “virtually every feature.” I believe the author has followed the rule, “Never say never.” As I stated above, even the person who appears to violate the cost/benefit analysis is actually following the rule in the end. Sure, there are irrational people who blatantly do the opposite of what their personal analysis guides them to do. I’m not so sure even they are violating the rule. Since they are irrational in the fact they appear to be costing themselves more than their benefits, they are more than likely irrationally receiving benefits in their mind which rational individuals do not understand. Since feelings and other factors cannot be quantified, each individual decision is subjective to their internal analysis. Common sense rules in the rational world.

Economics has long been thought of as a boring science. However, it is far from it when applied to our lives. If you take a step back and evaluate some of the decisions you have made, you will see how the cost/benefit rule dictates how you move forward in life. Take it a step farther. As you make decisions today, keep your mind open to your current decision making process. Most of the time, cost is determined by money, time, and happiness. Those are the easy ones we make. However, when faced with a difficult decision, many other factors come into play and these are the ones that create stress in our lives. We begin to include far too many factors in our decision making process because we want to be thorough and complex. I believe our decision making can be made easier if we follow the best result from this question: Are we helping people/family with our decision or are we hurting them? Answer that question and you’ll be better off. If you are hurting people with your decision making, then your cost/benefit analysis is irrational and broken.