Reason versus Emotion in Economics: A Praxeological Response

According to a relatively new economics field called Behavioral Economics (BE), one’s emotional state rather than reason influences their economic decisions. Vernon Smith, the BE economist who won a Nobel in economics, wrote:

People like to believe that good decision making is a consequence of the use of reason, and that any influence that the emotions might have is antithetical to good decisions. What is not appreciated by Mises and others who similarly rely on the primacy of reason in the theory of choice is the constructive role that the emotions play in human action.

Whether individuals are generally patient or impatient determines whether or not they are inclined to spend or save today, according to BE. If they are more patient, then they disposed to save more.

Furthermore, an emphatic person is more likely to make altruistic choices. Impulsive people are more likely to be impatient and might not save for their retirement. Venturesome individuals are more likely to take risks, including gambling.

People who fail to make choices based upon real facts will have difficulty supporting their life and wellbeing. According to Ayn Rand, emotions are not a valid means to assess reality: 

An emotion as such tells you nothing about reality, beyond the fact that something makes you feel something. Without a ruthlessly honest commitment to introspection- to the conceptual identification of your inner states – you will not discover what you feel, what arouses the feeling, and whether your feeling is an appropriate response to the facts of reality, or a mistaken response, or a vicious illusion produced by years of self-deception….

Once individuals establish that a particular tool will make them better off, they must make this tool, and they use reason, not emotions. By using reason, someone can establish the relationship between things and their suitability to support his life. Reason therefore is the individual’s means of survival. If reason is the key for individuals’ choices that support life and wellbeing, what is the basis for the BE conclusion that individuals’ actions are not rational?

The key reason for this is the assumption of the mainstream economics that individuals have given preference scales. This means that individuals do not change their mind. But does it make sense?

Do scales of preferences exist?

The mainstream economics framework is presented as though preference scales never change. The constancy of individuals preferences is considered by the mainstream framework as an important characteristic of rationality. However, people do change their minds, so it is not surprising that BE practitioners have “discovered” that the real people’s responses systematically deviate from the one of the human machine as depicted by the mainstream economics. Based on this the BE practitioners have raised doubts whether individuals are acting rationally in exercising their choices.

By downplaying the importance of the human reason, it is not surprising that BE practitioners believe that individuals’ choices are driven by emotions. Once the importance of reason is dismissed, human beings are regarded as objects. Consequently, human action is not navigated by reason but by outside factors that act upon men. By means of a given stimulus, one can then observe various human reactions and draw conclusions regarding the world of economics. According to Mises, however:

It is impossible to describe any human action if one does not refer to the meaning the actor sees in the stimulus as well as in the end his response is aiming at.

Contrary to the mainstream thinking, both Ludwig von Mises and Murray Rothbard held that valuations do not exist by themselves irrespective of the things to be valued. Hence, the so-called scale of preferences as presented by mainstream economists is nonexistent.

According to Rothbard there can be no valuation without things to be valued. Rothbard wrote that valuation is the outcome of the mind evaluating things. It is a relation between the mind and things that are being valued. 

Misesian framework of consumer choices 

Following Mises’s framework of thinking, we find the distinguishing characteristic and the meaning of human action. For example, one can observe that individuals are engaged in a variety of activities such as performing manual work, driving cars, walking on the street, or dining in restaurants. The distinguishing characteristic of these activities is that they are purposeful.

Furthermore, we can establish the meaning of these activities. Thus, manual work may be means for some people to earn money, which in turn enables them to achieve various goals like buying food or clothing. Dining in a restaurant can be means for establishing business relationships. Driving a car is a means for reaching a particular destination.

Individuals operate within a framework of means and ends, using means to secure them. Using means to reach an end implies that individuals do it consciously. Hence, we can also establish that human actions are not only purposeful but also conscious. BE economist Vernon Smith, however, rejects the view that human actions are conscious and purposeful.

Smith wrote:

He (Mises) wants to claim that human action is consciously purposeful. But this is not a necessary condition for his system. Markets are out there doing their thing whether or not the mainspring of human action involves self-aware deliberative choice. He vastly understates the operation of unconscious mental processes. Most of what we know we do not remember learning, nor is the learning process accessible to our conscious experience—the mind………Even important decision problems we face are processed by the brain below conscious accessibility.

We suggest that anyone who objects that human action is purposeful and conscious contradicts himself, for he is engaged in a purposeful and conscious action to argue that human actions are not conscious and purposeful.

Means-ends and consumer choices

In Mises’s framework of conscious and purposeful action reason individuals assess means at their disposal against their ends. Their ends set the standard for evaluating means and, thus, choices. By choosing a particular goal, one evaluates the means according to the suitability to achieve this goal.

For example, if my goal is to provide good education for my child, I will explore different educational institutions and evaluate them regarding the quality of education that they are providing. My standard of ranking these institutions is the end, which is to provide my child with a good education. This is contrasted with the mainstream framework where individuals’ choices are determined mechanically by the scale of preferences.

Conclusion

By doubting that reason is the main faculty that navigates human actions, behavioral economics emphasizes the importance of emotions. The practitioners of behavioral economics hold that individual conduct is not necessarily rational. Consequently, the practitioners have unintentionally laid the foundation for introducing government controls to “protect” individuals from their own irrational behavior. Furthermore, once one accepts that preferences are not hard wired in people’s heads, it makes little sense to attempt to extract these preferences in a laboratory, or by means of questionnaires.