Thursday, October 9, 2008

Does self-actualization promote greater rationality in market behaviour?

What is rational behaviour? It seems to me that rational behaviour is simply about making good choices – having the intention to make choices that we are prepared to endorse at a high level of reflection and being prepared to learn from our mistakes.

Economists often assume in their theoretical models that the world is populated by people who are a bit like Dr Spock from Star Wars. In Dan Ariely’s words: “Standard economics assumes that we ... know all the pertinent information about our decisions, that we can calculate the value of the different options we face, and that we are cognitively unhindered in weighing the ramifications of each potential choice” (“Predictably Irrational”: 239). Economists have reasons for making such assumptions in their models, but there are also good reasons why real people don’t behave like this. If we were to attempt to calculate the value of all the options every time we made a decision, the transactions costs (including time required) would be huge. Most of us have better things to do with our lives.

However, some of the evidence that Dan Ariely has presented suggests that humans often fail to make choices that would be capable of passing a much weaker test of rationality. We have predictable tendencies to make mistakes in decision-making and we often tend to make the same mistakes over and over. (I have written previously about Ariely’s book here).

While thinking about the question of whether self-actualization would help people make better choices I decided to revisit “Predictably Irrational” to see if I could find any relevant discussion. My hopes were raised when I found this: “If we all make systematic mistakes in our decisions, then why not develop new strategies, tools and methods to help us make better decisions and improve our overall well-being?” Unfortunately, the discussion that follows is mainly about what governments and employers etc could do to help us rather than about what we can do to help ourselves. However, Ariely does acknowledge that it might be possible for us to help ourselves: “Once we understand when and where we may make erroneous decisions, we can try to be more vigilant, force ourselves to think differently about these decisions, or use technology to overcome our inherent shortcomings” (244).

Why do I think it is worth thinking about whether self-actualization would promote greater rationality in market behaviour? It seems to me that people who rate highly in terms of self-actualization might be more competent in dealing with their own irrational tendencies e.g. in relation to gaps between wanting and liking (discussed here and here) and persuasion techniques used by others (including advertising agencies).

Instruments have been created to measure self-actualization (the POI or personal orientation inventory) and dimensions of personal well-being related to eudaimonia i.e. growth towards achieving the best that is within us and the exercise of practical wisdom. For example, Carol Ryff’s six-factor model of personal well-being covers self-acceptance, autonomy, personal growth, relations with others, purpose in life and environmental mastery (described here). I don’t claim to know much about measurement of such factors, but this model seems to have conceptual coherence. The six factors correspond broadly to the content matrices in Michael Hall’s matrix model (see: “Self-Actualization Psychology”, Chapter 11). (Hall’s matrix model provides a comprehensive framework for considering how the meanings that we attach to self, powers (potential), others, time and the market/environment/context relate to the beliefs, values, understandings, perceptions etc that make up our internal models of the world.)

As far as I am aware research relating to measurement of self-actualization etc. has not yet been used in behavioural economics research. It would be interesting to know whether the aspects of “practical wisdom” being measured in the self-actualization research correspond to enhanced rationality in market behaviour.

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