14th October 15
Shafiq Fakir, Business and Economics teacher at DLD College London, gave our students an Economics lecture on ‘The Calculus of Emotion’ which introduced them to rationality, strategic behaviour and game theory. Here are his thoughts on the subject.
The models of behaviour used as the foundation of microeconomics assume that consumers are rational, self-interested and intent on maximising their own satisfaction with limited income. They assume also that the ability of consumers to process information in making economic decisions is quite advanced.
Experiments in behavioural psychology and behavioural finance have repeatedly shown that rational decisions may be the exception rather than the norm. The ability of the human brain to take information into account before deciding may also be limited. Moreover, the unconscious pleasure centre of the brain may give excessive weight to certain types of economic information such as price when a person makes a decision to consume.
Self-interested behaviour is seen as logical and reasonable in economic models but when does self-interest become just plain selfish?
Has the positive feedback effect which starts from the unequal ownership of assets within a market economy led to the massive inequalities in wealth and income we see today? If so, how has this affected the attitude of the ‘haves’ towards the ‘have nots’?
Given the neurological and behavioural evidence should we now be questioning the fundamental assumptions of economic models with respect to consumers, perhaps it is time to abandon the principle of maximisation altogether and the Newtonian calculus which supports it. Perhaps, we should begin the effort to develop more realistic and accurate models which take into account emotion, irrationality and the limited ability of our brains to process economic data. The calculus of small changes is dead, long live the calculus of emotion!!