For a long time we assumed that humans are rational creatures and operate on the basis of rational self interest.
The basis of traditional economics is that people make rational decisons. It assumes that people make a choice that gets them the most benefit and is in their self interest.
Much philosophy is based on logic. The idea is that you can arrive at the truth through logic and dialogue, that the truth is somehow independent of how we think and feel.
These views of human behaviour are changing as we learn more about behavioural psychology.
Logic ran into trouble in 1931 when a mathematician called Godel figured out that you couldn’t prove everything with maths.
In essence a general sense any system based on axioms and deduction, such as arithmetic, would contain within it statements that can “neither be proved nor disproved”.
What this means is that you can’t argue that something is “true” purely using logic and maths because there will always be something within that framework of knowledge that you need to “believe”.
So, logic starts to experience problems when it comes to explaining the complexity of human behaviour. Economic logic has run into that problem – the kind of behaviour predicted by traditional economics is something people just don’t do.
For example, ask people if they would rather be paid £100k and all their friends be paid £200k, or if they would rather be paid £80k and all their friends be paid £60k.
The rational choice, the one that maximises benefit is the first choice. But most people will go for the second choice because they think about what the benefit to them means when compared to what others get. In essence, value is relative and not absolute.
One reason for this is that our brains were not “designed” to be logical. Evolution didn’t design us or decide what attributes to give us.
In Daniel Levitin’s book The Organized Mind he describes how the brain was not engineered. Instead he says that “The brain is more like a big, old house with piecemeal renovations done on every floor, and less like new construction”.
The human brain is a concoction of systems – from the lizard brain that runs away, fights and reproduces to the pre-frontal cortex that allows us to think about the future.
Biology has more to say about why people think and act the way they do these days than does economics and philosophy. We can look inside the brain and understand the structure of memory and decision making better than ever now.
For example, we know that when people are stressed, their brains revert to lizard mode.
Any organisation that wants to make better decisions needs to make sure that their people don’t operate under stress. That is guaranteed to get the lizard brain operating and will result in decisions based on fear or violence (flight or fight).
It’s almost impossible to switch from lizard mode brain into thinking brain when you are under pressure.
The only way to operate is to decide ahead of time what you are going to do and then follow that plan.
We need to work at being rational – it’s not something that comes naturally in all situations. The rational thing to do is assume that we are always going to default to decisions based on fear or aggression and we need to work on improving our decision making.