My favorite books on emotions and economic decisions

Economic theory assumes that humans are rational in the sense that faced with choices, humans engage in a clear-headed calculation of the benefits and costs; that we possess foresight and are able to undertake complex calculations and we are interested in maximizing utility, which may purely be a function of monetary payoffs but may include others factors as well.

But humans are boundedly rational. This means that our behavior differs from the assumptions of traditional economic theory in two major ways.

One is that we often fall prey to cognitive biases. The second way our behavior differs from utility maximization is that we are driven by emotional dispositions such as fairness, trust, reciprocity, altruism, and a host of social norms.

While my book provides experimental evidence for the latter, Kahneman’s books shows how our behavior is affected by various cognitive biases.

Anyone who is interested in decision-making across a range of contexts must read this book. 

In many ways Gigerenzer’s book provides a counterpoint to Kahneman.

Kahneman argues that humans often use mental shortcuts (“heuristics”) to make decisions in particularly complex situations but in doing so we fall prey to cognitive biases that lead to systematic errors in judgment. Gigerenzer counters by showing that billions of years of evolution have endowed our brains with the capacity to cut through the noise and arrive at decisions quickly especially where time is of the essence. Doing so often leads to outcomes that are no worse than other more time-consuming and deliberative methods.

Many of Gigerenzer’s arguments and findings found their way later into Malcolm Gladwell’s best-selling book Blink (without always acknowledging Gigerenzer’s intellectual primogeniture). Gigerenzer is also a leading stalwart in the field of behavioural economics and like Kahneman, his book should also be essential reading for those who want to under human decision-making and how decision-making processes differ across different contexts.

I also highly recommend Gigerenzer’s book Risk Savvy about how we often misunderstand the risks in a given situation. 

To a large extent, the research agenda that is subsumed under the rubric of “behavioral economics” started with the idea of bounded rationality and the departures from the utility maximizing model of economics.

Many of the ideas pursued in this line of work owe their origin to the work of Herbert Simon, whose doctorate was in political science from Chicago in 1943 but who was awarded the Nobel Prize in Economics in 1978 for combining ideas from mathematics, psychology, economics, and computer science to understand decision making in large organizations. This is not to suggest that none of this was known before.

In fact, some people consider Adam Smith to be the first behavioral economist for his work The Theory of Moral Sentiments, which incorporates ideas from David Hume that it is passion (or emotions) that drive human behavior rather than deliberative reasoning. But, by and large, Simon’s work provided a much more comprehensive overview of these issues and set off what might be called the behavioral revolution that merges insights from diverse social sciences to provide more realistic models of decision-making. 

I am tempted to say: Because Frank is a delightful writer and leave it at that.

This book reiterates similar themes in discussing how a variety of supposedly non-economic factors affect economic decisions.

In this book Frank discusses how noble human tendencies (moral sentiments) may have not only survived the pressures of the material world, but actually have been nurtured by them. The title is a play on the David Hume quote that “Reason is, and ought to be the slave of the passions, and can never pretend to any other office than to serve and obey them.”

To those interested, I also recommend any of Frank’s other books including Choosing the Right Pond, The Winner Take All Society, and The Darwin Economy. 

For a long time the social sciences behaved as if evolutionary theory stopped at the threshold of human society; that it could tell us something interesting about animals up to higher apes but when it came to humans, our minds were a tabula rasa (a blank slate).

As we now know all too well, this is incorrect.

Our minds have been shaped by the same evolutionary forces that apply to others. This in turn leads to the question: how would moral sentiments such as altruism or cooperation survive? Will such altruists not be vulnerable to exploitation by free-riders who would benefit at the expense of those sacrificing individual self-interest for the greater good?

In this book Sober (a philosopher) and Wilson (a biologist) provide an evolutionary rationale for how other-regarding preferences have evolved and are at times better suited for our survival than purely self-regarding ones.

As an economist, I have never been any taught any evolutionary theory formally. Matt Ridley’s The Red Queen and The Origins of Virtue: Human Instincts and the Evolution of Cooperation along with this Sober and Wilson book provided me with a comprehensive overview of how other-regarding behavior can survive and propagate in human populations.

I would add the two Ridley books to this list too but unfortunately, I have used up my quota of five books.