The flawed, absent-minded, over-confident thinking economists see in all of us

Richard Thaler, a pioneer in the field who was awarded the Nobel economics prize this year for his efforts, said in his acceptance speech that his work has focused on how to introduce humans into economic theory as the fallible, absent minded, procrastinating, and notoriously over-confident people we can be.

The Canadian Press canvassed some of Canada’s prominent economists to find out where they see some of the biggest disconnects between the rational-thinking optimizers of traditional economics and the world in which we all actually live.

> Too little time, too little value
Jim Stanford, former Unifor economist and author of Economics for Everyone, says one of our big oversights is not putting enough value on time itself.

“People undervalue their own time, on the assumption that time doesn’t have any visible value directly attached to it…But, of course, the older we get, we realize time is the most valuable thing there is.”

He says that flaw comes up in everything from a willingness to walk long distances for cheaper parking, to not factoring in how long it can take to assemble Ikea furniture.

And when people don’t value time enough, it makes it easier for companies and governments to take more of it for free, whether it’s being stuck on hold, working unpaid overtime, or the increasing need to wait for jobs in the gig economy, he adds.

“The fact that time seems to be free leads to real inefficiencies in how we organize things in the economy.”

> One-track minds
Trevor Tombe, an economist at the University of Calgary, says that he sees many of the flaws identified in behavioural economics play out in public policy debates.

One of the key issues he sees is confirmation bias, in which people seek out and interpret information that is consistent with their own prior views, which has only been made worse by social media and other tools to screen out dissenting opinions.

He says the false consensus effect is also at play. This includes when people tend to think their own views are much more widely held than they truly are.

“That’s in part, what leads the debates in the political arena or about policy to be highly polarized.”

> The fear of missing out
Doug Porter, chief economist at BMO Financial Group, says he’s been struck by how much people pay attention to saving dollars and even pennies on smaller purchases, but have been willing to increase home price bids by tens of thousands of dollars to get in the market.

He says the fear of missing out was well on display in the Toronto real estate market this year, despite rising concerns of a bubble.

Porter says there are shifts that can indeed change market fundamentals — and it’s difficult to know you’re in a bubble when you’re in the middle of it — but he said people should be careful when buying into a market that seems to be going up on speculation alone.

“Where you have to be cautious is when people are buying because they think prices only have one way to go. They’re buying simply because things are going up, not because things have fundamentally shifted.”

> Boredom and bad decisions
Craig Alexander, chief economist at the Conference Board of Canada, gets frustrated when people spend far more time on research on small consumer purchases like televisions than on far more important financial decisions.

He sees the same pattern play out in deciding on retirement savings, buying insurance, and other economic decisions that can be intimidating (and possibly quite dull).

“Some people find finance scary. There’s a language to it — they don’t understand the language, they’re uncomfortable with it, so they avoid it. And it’s a natural tendency, but it can lead people to making poor choices.”

He says behavioural economics has helped, by “nudging” people to make better decisions like having people enrolled in pension programs by default, but not taking away their free choice by being allowed to opt out.

> Under pressure
Frances Woolley, an economics professor at Carleton University, sees all sorts of behavioural quirks in tipping.

Even the suggestion of a 15% to 25% tip on a machine leads people to believe its the reasonable amount, says Woolley, an example of the so-called anchor effect that behavioural economics identifies as relying too heavily on the first piece of information offered.

The field also explains that people will do something like tipping just because other people are already doing it, she says.

But as an economist she’s still puzzled by a tipping culture that can see a server at a high-end restaurant earning more than, say, a child care worker.

“Do we really need smart and entrepreneurial people working as servers in high-end restaurants — because that’s what we’ll get if serving pays better than comparable jobs.”

> Economists are not normal
Chris Ragan, chair of Canada’s Ecofiscal Commission, says he’s learned through his outreach efforts on carbon pricing that economists are not like normal people, and they think differently than most people about key metrics like prices.

He says part of the negative response to carbon pricing is that many people only see a price increase, and not the system behind it.

“Economists see prices as allocating resources, as sending signals, and over time changing behaviour in response to price changes,” he says.

“Economists see not just a price, but a price system, as playing this super vital role in organizing society and allocating resources. Normal people don’t think that way.”