From Economic Psychology 
to Economic Prevision

Economic players and their biases

Economic evolutions are not caused only by physical factors
but also by decisions made by human people and organizations.

The economy is a dynamical system which evolution is not linear.
Only scenarios can be made, not precise projections.
The "human aspect" cannot be fully put into predictive equations.

Behavioral economics findings help to see clearer what makes
economic players act, mainly by identifying individual and collective
behavioral biases and their economic incidences.

  sous  brain   What would people do next
                            to earn their bread?

Everything rests on people's behavior

The economy, as a sector of human activities that rests on production and
distribution to fill human needs, is not just generated by natural resources
(an old interpretation that surges again as their demand grows and makes
some pundits entertain a fear of scarcity) and
other hard factors.

A focus on physical and natural riches is understandable (*) but it neglects
largely that the economy
is chiefly made by person
person people:
* Either individually
* or via their
organizations (**), such as businesses and some
   administrations.


(*) Solutions that aim only to restrict their use are an insult at :
      * mankind, considered unable to find more creative solutions,
      * markets that  have their own natural tool to manage scarcity:
         the price.
(**) No mystery here, this is obviously true in most social activities,
        such as politics and community life.


Those
economic players, operate as, to cite their main activities (and
focus on the law-abiding ones ;-)):
Producers, workers, sellers, consumers, investors, borrowers,
taxpayers (or ...tax collectors)
If for example we look at the production aspect, economic results
can be quite
different with
the same generally available
basic resources
, because of:
* the way those people / units use those resources for producing,
* what
end-products they create and use,
* what still untapped resources they discover and can use.
More generally, how the economy works rests:
  • For a small part on the physical environment.
  • For the largest part on those people's behaviors.

Among the events that stray from the visible path, and that should be
taken
into account,
if possible from the start, when we make
economic anticipations and decisions, we might encounter :

* Not only near-mechanical
extreme events / disruptions
* But also "soft" elements such as changes of players' attitudes.

In other words, the human factor is one of the main cause of economic
uncertainty, as it is difficult to forecast:

* How those "economic players" will behave
* What economic effects those behaviors will bring.

What makes economic behaviors?
Can they be predicted?

The quest to understand motives ...and their biases


The economic behaviors of those players are driven by their
* Needs, preferences,
* Either instant or deep,
pleasure pleasurable of pain  painful
   emotions,

* Attitudes, either positive or negative, active or passive towards
  
some economic goods, operations or players.
* brain Cognition : knowledge and reasoning, conscious or
   unconscious (neurons never sleep)
Actually, economic players are just partly rational ("bounded rationality").
Various
biases interfere, some occasionally, others recurrently, in their
decisions.
Anyway economic rationality is a complex complex notion.
It cannot be reduced to "economic utility maximation" as some
classical economists stated.
Other goals, motives and interests than personal economic gains and
safety drive also people in their decisions, even their economic decisions.

In order to help economic prevision making (and if possible ...to give a few
tips that might prevent some economic blunders) a relatively recent field
of study called Behavioral economics
(*) tries to identify:
  • Those economic behaviors.
  • Their associated motives (preferences...),
  • Their most frequent types of decision biases.
  • The overall economic incidences of those decisions / behaviors
(*) Those aspects are largely detailed in the
       Behavioral economics
article

Consequences for economic models

All those traits, related to an evolutive system, human motivations, and
their collective interactions, cannot be fully known in advance.


This is one of the flaws of purely statistical /
probability (*)
driven previsions
.
(*)
Of course probabilities give important data, and to neglect them fully
      is a recipe for illusions but on the other hand their possible flaws or
      drastic evolutions should be kept in mind.

=>
This leads to different
app
roach for economic models.

Therefore economic predictive models using sophisticated maths are
currently highly criticized if not derided.
They often rest too much on
past data and
dixerandom laws
(and other "mechanical" laws /
correlations
network that link economical data aggregates).
In our world in turmoil, no wonder holes can appear in those ideal
fabrics.

How to make those models more flexible?
An obvious trick is to include a
éventail range of various scenarios
that take into account
surprise "surprises" that escape such laws.

Another one is to use  easy to
tool adjust parameters.

The "big data" challenge

The new Grail? Or a perilous quest?


Big data crosses a huge mass of diverse informations, until then found and

used separately or as too short statistical series.

Big data can by the way infringe personal privacy


It might spot hidden trends / correlations, rare events and weak signals

better.

It can bring some order, a better understanding within the information

overload.

Thus it promises to help make much better previsions, to orientate

decisions more effectively.


On the other hand, human wisdom will stay more than ever crucial


* to make a sorting, to admit that an avalanche of diverse data does not
   make the fundamental uncertainty disappear, that many decisons

   will keep being bets on an unknown future.


* thus to orientate / apply the big data researc and findings wisely and

   creatively, not in a systematic / one-sided / over-confident way

   (extreme numeracy bias).


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M.a.j. / updated : 29 Aug. 2015
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