Daniel Hannan is an MEP for South-East England, and a journalist, author and broadcaster. His most recent book is What Next: How to Get the Best from Brexit.
Would you go an hour out of your way to get £100 discount on a £300 dishwasher? What about going an hour out of your way to get a £100 discount on a £12,000 car? If you’re typical, you’re much more likely to have answered yes to the first question than to the second. Which, logically, makes no sense at all. Either an hour of your time is worth £100 or it’s not. If the trade-off is in your interest – and, for most of us, it is – then you should make it both times. If you happen to be a hedge-fund owner or a gilded public-sector princeling, then you might rationally say no both times. But there is no sound basis for saying yes to one and not the other.
We are not rational consumers. That was the central insight of Richard Thaler, who has just won the Nobel Prize for Economics. We did not evolve in the modern environment – a secure, interconnected and populous world, where we confidently rely on strangers, where resources are plentiful, and where there is a premium on abstract reasoning. We still have the instincts and intuitions of hunter-gatherers.
Because our irrational tendencies have a genetic basis, they are predictable. We are irrational, in other words, in consistent ways. To give a very basic example, we are irrationally loss-averse. We are more upset about losing something that we already have than we are happy about gaining something of precisely equivalent value. In games of chance, we bet accordingly. In markets, we do the same, offering opportunities to those who anticipate the error.
Some of these biases are obvious once they are pointed out. The sunk-costs fallacy, for example, that prompts us to throw good money after bad. The various self-serving fallacies that make us put our own behaviour in a better light than other people do. The thought experiment that began this article is in that category: it is easy to see why £100 might look larger in one context than in another.
Yet the same faulty wiring in our brains causes some odd and slightly scary distortions. A judge who is asked to write down a number between 1 and 5 before entering the courtroom will sentence more leniently than one asked to write down a number between 1 and 100. The sooner we understand these quirks, the better.
The politician who has some grasp of heuristics and behavioural psychology is at a huge advantage over the one who hasn’t. Just as, at some point in the 1970s, it became more or less necessary for MPs to have a rough sense of economics, we are approaching a similar moment over evolutionary biology.
The discipline is a young one. Thaler was one of the pioneers, along with the wonderful Israeli-American psychologist, Daniel Kahneman, who won the Nobel Prize for Economics in 2002. Their insight was a simple one: that our brains were not made for the modern world, but were cobbled together in what the NYU psychologist Gary Marcus calls a kluge (pronounced cloodj), with older functions being repurposed, sometimes inadequately, to new uses. From that simple insight flow vast consequences.
Arguably the first world leader to grasp the importance of cognitive biases was David Cameron, who was so taken by Thaler’s book, Nudge, that he made his ministers read it and set up a government unit to apply its insights. Some of his first decisions as Conservative leader were pure Thaler. Do you remember the way he used to complain about supermarkets displaying chocolate oranges at their counters instead of real oranges? Or how he ticked them off for marketing inappropriate clothes at little girls? Many libertarians bridled: what the hell was a Tory leader doing telling private enterprises what to sell? In fact, Cameron was using Thaler’s theory in a classically conservative way. He didn’t want to regulate retailers through legislation; so he nudged them. By and large, it worked.
How should politicians use behavioural psychology? One of my earliest ConservativeHome columns, drawing on the brilliant work of Jonathan Haidt, was about what makes Leftists tick at a neurological level, and how conservatives should respond. But this goes beyond campaigning.
I’d like to see psychology taught in every school. If all school leavers had some notion of, for example, opportunity costs, they would behave differently as consumers, citizens and, indeed, voters. It is alarming to see how many people respond to, say, an offer of free tuition fees or a public sector pay rise without stopping to ask where the money is coming from.
Kids can assimilate these concepts at a young age. I saw a visiting lecturer in my constituency holding rapt a group of Year 5s and 6s by showing them optical illusions, and then gently introducing them to the vertiginous idea that their minds were constantly taking short-cuts, so that everything they saw was a kind of illusion.
The problem won’t be adding the subject to the curriculum; it’ll be making space for it by cutting something else. Status quo bias, you see. Once you grasp these things, everything becomes clearer.