Behavioral Economics Doesn’t Understand Happiness

More of everything, less choices or outwitting our brains?

Share with your friends

More share buttons
Share on Pinterest

By Terry Burnham

What would make you happier in 2016?

If you could change one aspect of your life during 2016, what would make you the happiest? Imagine yourself on December 31, 2016 looking back with satisfaction on 2016. What would it be?

Standard economics has an answer. It is illustrated by this anecdote conveyed to me by Professor Amartya Sen, Nobel Laureate in Economics. Walking through Harvard Square one day Professor Sen asked me, “What should you do if you see a person trying to cut his fingers off with a pair of dull scissors?”

My response: stop him from cutting off his fingers, call the police for help, etc.

“Offer him sharper scissors,” was Professor Sen’s answer. Standard (a.k.a. “neoclassical”) economics assumes that people know what they want. Professor Sen is a critic of some aspects of neoclassical economics, so his question (and answer) was a rhetorical maneuver designed to educate.

Let us to return to your happiness in 2016.  Did you secretly answer, more money?

More money, more money, more money. Yes, yes, and even more yes. More money would make everything better. Pay off some bills, wrestle the monetary stress monkey off your shoulders, take a well-earned vacation. Send some cash to Mom. Yes. More money.

To the answer of more money, neoclassical economics says amen. Standard economics assumes that people know what they want (have “stable preferences”) and know how to make themselves happy (“maximize”). Thus, the way to make someone happier is to increase their opportunities — more money and more time.

Get Evonomics in your inbox

We make the Harvard Square resident happier by helping achieve her or his goal, not by imposing our own goals. Similarly, all we have to do to make anyone happier is provide more money or more time. The individual will make the best choices for themselves.

Thus, the neoclassical economic prescription is clear. More money, better medicine, a fountain of youth. Case closed.

Just as you are ready to seal your 2016 wish for a winning lottery ticket, Professor Richard Thaler yells, “Wait a minute!” Neoclassical economics is all wrong according to Thaler (you can read his recent book Misbehaving or watch his talk summarizing the book and his career).

Behavioral economics argues that the neoclassical economics is wrong. Real humans, in the language of behavioral economic founders Daniel Kahneman and Amos Tversky, exhibit biases and heuristics, or, more colloquially, humans are crazy.

For the sake of your 2016 wishes, behavioral economics makes three related claims. First, people do not know what makes them happy. Second, fewer options are sometimes better than more options. Third, more money may not make you happier.

A key moment in Richard Thaler’s intellectual life involved a bowl of cashews. Thaler was hosting a party, and had served some cashews as an appetizer. His guests were voraciously eating the nuts; so much so that Thaler worried their appetites would be satisfied before dinner. He removed the remaining cashews. The result? His guests thanked him.

What do cashews have to do with economics? Neoclassical economics argues that people should always be happier with the option to eat cashews. Thus, Thaler’s guests should have been unhappy when he reduced their choices.

Perhaps, Thaler realized, standard economics is wrong in assuming people are rational maximizers. If this is true, perhaps the person in Harvard square attempting to self mutilate with blunt scissors would be happier with fingers than without.

Does more money equal more happiness? It sure feels like it to me. However, there is a major academic debate on this topic, and one (almost settled) result is that extra money does not make any permanent change in happiness for most people.

“Wealth is the parent of luxury and indolence, and poverty of meanness and viciousness, and both of discontent,” so wrote Plato more than two thousand years ago. Plato’s complex view on the relationship between money and happiness is a reasonable summary of the field today.

So if money is not the key to happy 2016 what might be? Mired in internecine warfare between neoclassical and behavioral schools, economics cannot help.

The Darwinian view is that happiness is a tool to guide behavior toward evolutionary success. Can this perspective help?

Allow me to cut directly to my speculative answer. Physical activity is much more likely to make you happier than money. If that is true, why do I/we often want to lie on the couch instead of running marathons.

My speculation is that we are built to get pleasure from activities that lead to evolutionary success. However, what matters for our happiness brain structures is the relationship between behavior and evolutionary success, not for us, but for our ancestors.

Let me continue my just-so story by asserting that up until fairly recently on an evolutionary timescale, humans were often hungry and extremely physically active. Our ancestors would have benefitted from a day on the couch eating high-caloric foods. Compared to us, they had very high activity levels, lower caloric intake, and fewer possessions.

The ‘mismatch’ idea is that while our world has changed incredibly rapidly, our genes and brains have not. Thus, our tastes still reflect the world of our ancestors. So we think more money will make us happier, because more resources would have led our ancestors to greater evolutionary success. Similarly, we are built to be energetic thrifty because our ancestors were on a tight caloric budget.

In short, we love to eat and sleep because eating and sleeping were good for our ancestors.

What is your reaction to the ‘cavewoman and caveman’ approach to understanding your 2016? Perhaps you are thinking of Voltaire, “Things cannot be other than they are… Everything is made for the best purpose. Our noses were made to carry spectacles, so we have spectacles. Legs were clearly intended for breeches, and we wear them.” (This is actually Voltaire mocking the ideas of the German 17th century philosopher Gottfried Leibniz who was known for his optimism and for arguing that our world was the best possible one.)

We tend to love money because resources were good for our ancestors, and many of us hate useless exercise because it was bad for our ancestors. Without evidence, this can be criticized as a ‘just-so’ story. Stephen Jay Gould and Richard Lewontin make just such a critique of evolutionary thinking in their famous 1979 paper, The Spandrels of San Marcos, and they include the Voltaire section above.

What is the response to the Gould and Lewontin critique? Yes, at worst, my caveperson explanation is just-so story.

One person’s just-so story, is another’s NSF grant application. There are many scholars working hard to convert evolutionary hypotheses to testable theories, but, as of 2015, these approaches are not fully investigated. Consequently, I support spending more money investigating evolutionary hypotheses over the next 20-100 years.

What about our 2016 resolutions? Can we wait for decades? No. We have to decide now. Here are three possible choices for 2016.

  1. Neoclassical economics. Pursue the almighty dollar
  2. Behavioral economics. Hide cashews from yourself. Stumble around confused.
  3. Evolutionary economics. Work out more. You are smarter than your brain.

25 December 2015

Donating = Changing Economics. And Changing the World.

Evonomics is free, it’s a labor of love, and it's an expense. We spend hundreds of hours and lots of dollars each month creating, curating, and promoting content that drives the next evolution of economics. If you're like us — if you think there’s a key leverage point here for making the world a better place — please consider donating. We’ll use your donation to deliver even more game-changing content, and to spread the word about that content to influential thinkers far and wide.

 $3 / month
 $7 / month
 $10 / month
 $25 / month

You can also become a one-time patron with a single donation in any amount.

If you liked this article, you'll also like these other Evonomics articles...


We welcome you to take part in the next evolution of economics. Sign up now to be kept in the loop!

  • Koenfucius

    Interesting article, but a bit of a pity about the clickbaity title and the cheap dig at behavioural economics.

    Saying that neither Neoclassical nor Behavioural Economics understand happiness tells us little more than saying that Medicine, Chemistry, or Mathematics don’t understand happiness. Are there serious neoclassical or behavioural economists that actually believe their science does, or should, understand happiness?

    However, just like it is (arguably) a behavioural economics insight that suggests removing the cashews is a good idea if you want to help your guests resist temptation or instinctive munching so they can enjoy the main meal, behavioural economics insights can help you towards your aspiration of working out more. Unless you intervene to make it easier to exercise, you’re more likely to stay on your couch than to go running a few times a week, let alone to run several marathons.

    I believe the concept of evolutionary economics is interesting and valuable enough to stand up as a complement to neoclassical and behavioural economics. There is really no need to erect and then pull down straw men to make its case.

  • heksenjacht

    Well as Campbell notes: “The direct pursuit of happiness is a recipe for an unhappy life.”

    I agree with the author’s main point, namely that economics will do well to include evolutionary psychology — if our mind and body are a product of evolution, happiness surely plays a role.

    Happiness could be seen as an adapted incentive to seek ‘evolutionary fitness’. But it is essential to note that our genes do not care whether we are happy or not. Our bodies are temporary gene machines, ready to be disposed when it has done its job it was designed to do, namely multiplying the genes.

    Happiness is a treadmill, though we could raise our base happiness (Gilbert). This point fits perfectly with the narrative of economics, namely scarcity. We are always seeking for more, as the author notes regarding money. This non-zero-sum human productivity raises the standard of living, which indeed correlates with happiness.

    The quality of life has vastly increased, which in the end is what economics is all about.

  • Harry Alffa

    2. Hide money from bankers:

  • William Davis

    “We are smarter than our brains.”

    I think a collection of ideas is other than the sum of ideas themselves. If this were true, then the collective intelligence is, maybe not smarter, but at least other than what goes on in the individual. This coincides with what heksenjacht said about our bodies being machines for the genes, and allows the possibility for an “indirect” economic model. What economics assumes is that there is an end point: a state to be acheived, and that the state is indeed acheiveble. This is not an assumption made by our current physics model that relies heavily on relativity and the interconnectedness of matter. I hate to seem like a reductionist like that, but it’s not really “reduction”, just like it’s not “greater than”, if it’s just recognition of the “other”. Evolution can’t make the assumption that there is a state to be acheived, either. In fact, this promotes the argument for progressive evolution: that objects change in order to pursue a direction that changes depending on the objects. In physics, this is called “homeostasis” or “equilibrium”. Neither of these are actually experienced except in relativistic observation, sort of like the platonic solids, but are nonetheless the direction of flow.

  • Δημήτριος Επαληθεύσιμος

    The example with cashews tell us in fact, that there has allways have to be a regulator, someone that both understands our needs and foresees the results of our action, regulating our needs to an end that he sees fit for us, allways ready to intervene when our needs deviate from a larger scope, at the time unrevealed to us. But is there really a scope, a telos?

  • evanhadkins

    I think the distinction you’re after is flourishing and happiness. Perhaps joy (something that bubbles up from us in particular situations) rather than happiness. Time looking after children can be exhausting and far more satisfying than much pleasure.

  • dougcarmichael

    Happiness if often treated as consumer bliss. Thomas Jefferson , in “Life, liberty and the Pursuit of happiness”, had a different idea (coming from the Scottish enlightenment according to Gary Wills in his book Inventing America on the sources of The Declaration). It means the number of happenings in your life, the roles you played, as father, soccer coach, art collector, etc, actions that tied your talents to reality. This was happiness.

    I like this because it suggests that our standard assumptions are often bad habits and get in the way of new thinking.

  • Frank Messmann

    Happiness differs around the globe. Chinese and Americans differ genetically. One race, to put it simply, tends to find happiness in the hierarchically structured group. The other race seems genetically influenced to prefer liberty.

  • David Whitlock

    If we want humans to have a chance at happiness in perpetuity, then our economic system needs to be sustainable, stable and self-regulating, also in perpetuity.

    The only way to do that is to eliminate unpriced externalities from markets (because markets can’t work if their are unpriced externalities), and make prices proportional to costs (which means no monopoly power).

  • ari9999

    A fun piece. Coherent, too! Ah, happiness. . . 🙂

  • X-7

    Greets Dr. Burnham,
    I study code in a physics / evolutionary context, including monetary code.
    Dr. Lee Goldman (Columbia) argues, in “Too Much of a Good Thing,” that the modern world has made some of our genetic code defective. (See NYT Sunday book review of “Too Much”).
    I agree with Dr. Goldman’s premise, and argue: Just as exponentially accelerating complexity has rendered portions of our genetic code dysfunctional, the same can be said about our cultural genome, that is, the coding structures humans-as-cells in the cultural organism use for our reality / relationship interface.
    “The story of human intelligence starts with a universe that is capable of encoding information.” Ray Kurzweil – How to Create a Mind
    Codes are physics generated (sometimes by human “constructors” — David Deutsch’s term) & physics efficacious in networks.
    Codes are information processing technology (relationship infrastructure) for structures in bio, cultural & tech networks.
    Complexity can erode their efficacy.
    “A technology can only be pressed so far before it runs into some limitation.” Brian Arthur – “The Nature of Technology”
    More context from some great information processors:
    “Any final state contains information about the system’s initial state and about what has happened to it since. So, the motion of any physical system, because it obeys definite laws, can be regarded as information processing.” David Deutsch
    “The most fundamental phenomenon of the universe is relationship.” Jonas Salk – Anatomy of Reality
    Our current cultural coding structures can’t process complex network relationship information with sufficient speed, accuracy & power.
    This contributes to our conversion of the sky into a lethal gas chamber (largely a gas chamber of commerce) . . . and myriad other dysfunctional relationships.
    In the transition from hunter-gatherer social structures to exponentially more complex information architecture of city states, we added alphabet, legal, monetary and etiquette coding structures to our cultural genome. Per complexity, we need to do this again, to survive.
    With regard to info processing reach, speed, accuracy & power:
    Software code is to monetary code as alphabet code was to pictograph code.
    In an attempt to think outside the coffin, I’ve written “Culture, Complexity and Code.”
    Happy to send to it to thee, should you be interested.
    Best to Thee,
    Bryan Atkins

  • Pingback: Behavioral Economics Doesn't Understand Happine...()

  • Pingback: 10 Best Happiness Posts of 2015()

  • Pingback: 10 Best Happiness Posts of 2015()