Money and Finance
- Remembering ‘adam Smith’ - By Jason Zweig
Link to: Remembering ‘Adam Smith’George J.W. Goodman, known as Adam Smith to his readers and Jerry to his friends, died last month, age 83. But his work will outlive him for years, and quite likely decades, to come. Warren Buffett considers Jerry...
- This Day In Failure: September 20
I hadn't heard of this fact before: 1911: While beginning her fifth Atlantic crossing under the command of Captain E.J. Smith, the ocean liner Olympic collides with the HMS Hawke, punching a triangular hole eight feet by fifteen feet in...
- The Gutenberg Economy - By Michael Lewitt
Adam Smith is spoken of as the father of modern laissez faire capitalism, as well he should be. But the market system Smith described in The Wealth of Nations (1776) no longer exists. Instead, it has morphed into a system of fiat money that owes its existence...
- Paper: William D. Hamilton’s Work In Evolutionary Game Theory
Abstract William D. Hamilton’s impact on contemporary views of evolution has been nothing short of revolutionary, and his contributions to our reasoning on kin selection, genomic conflicts, parasitism and costs of sex dominate these fields. He also...
- Wsj: Peer Pressure And Other Pitches
Thanks to Will for passing this along. More businesses are using behavioral economics to appeal to customers, seeking to capitalize on the notion that people don't always act in their economic self-interest. Behavioral economics is popular among academics,...
Money and Finance
Adam Smith, Behavioral Economist
From the Journal of Economic Perspectives – Summer 2005
In The Wealth of Nations, published in 1776, Adam Smith famously argued that economic behavior was motivated by self-interest. But 17 years earlier in 1759, Smith had proposed a theory of human behavior that looks anything but self-interested. In his first book, The Theory of Moral Sentiments, Smith argued that behavior was determined by the struggle between what Smith termed the “passions” and the “impartial spectator.” The passions included drives such as hunger and sex, emotions such as fear and anger, and motivational feeling states such as pain. Smith viewed behavior as under the direct control of the passions, but believed that people could override passion-driven behavior by viewing their own behavior from the perspective of an outsider—the impartial spectator—a “moral hector who, looking over the shoulder of the economic man, scrutinizes every move he makes” (Grampp, 1948, p. 317)
The “impartial spectator” plays many roles in The Theory of Moral Sentiments. When it comes to choices that involve short-term gratification but long-term costs, the impartial spectator serves as the source of “self-denial, of self-government, of that command of the passions which subjects all the movements of our nature to what our own dignity and honour, and the propriety of our own conduct, require” (Smith, 1759 [1981], I, i, v, 26), much like a farsighted “planner” entering into conflict with short-sighted “doers” (Shefrin and Thaler, 1981). In social situations, the impartial spectator plays the role of a conscience, dispassionately weighing the conflicting needs of different persons. Smith (I, i, v, 29) recognized, however, that the impartial spectator could be led astray or rendered impotent by sufficiently intense passions: “There are some situations which bear so hard upon human nature that the greatest degree of self-government . . . is not able to stifle, altogether, the voice of human weakness, or reduce the violence of the passions to that pitch of moderation, in which the impartial spectator can entirely enter into them.”
Adam Smith’s psychological perspective in The Theory of Moral Sentiments is remarkably similar to “dual-process” frameworks advanced by psychologists (for example, Kirkpatrick and Epstein, 1992; Sloman, 1996; Metcalfe and Mischel, 1999), neuroscientists (Damasio, 1994; LeDoux, 1996; Panksepp, 1998) and more recently by behavioral economists, based on behavioral data and detailed observations of brain functioning (Bernheim and Rangel, 2004; Benhabib and Bisin, 2004; Fudenberg and Levine, 2004; Loewenstein and O’Donoghue, 2004). It also anticipates a wide range of insights regarding phenomena such as loss aversion, willpower and fairness (V. Smith, 1998) that have been the focus of modern behavioral economics (see Camerer and Loewenstein, 2004, for a recent review). The purpose of this essay is to draw attention to some of these connections. Indeed, as we propose at the end of the paper, The Theory of Moral Sentiments suggests promising directions for economic research that have not yet been exploited.
………………..
Related books:
The Theory of Moral Sentiments
The Wealth of Nations
The Authentic Adam Smith: His Life and Ideas
-
In The Wealth of Nations, published in 1776, Adam Smith famously argued that economic behavior was motivated by self-interest. But 17 years earlier in 1759, Smith had proposed a theory of human behavior that looks anything but self-interested. In his first book, The Theory of Moral Sentiments, Smith argued that behavior was determined by the struggle between what Smith termed the “passions” and the “impartial spectator.” The passions included drives such as hunger and sex, emotions such as fear and anger, and motivational feeling states such as pain. Smith viewed behavior as under the direct control of the passions, but believed that people could override passion-driven behavior by viewing their own behavior from the perspective of an outsider—the impartial spectator—a “moral hector who, looking over the shoulder of the economic man, scrutinizes every move he makes” (Grampp, 1948, p. 317)
The “impartial spectator” plays many roles in The Theory of Moral Sentiments. When it comes to choices that involve short-term gratification but long-term costs, the impartial spectator serves as the source of “self-denial, of self-government, of that command of the passions which subjects all the movements of our nature to what our own dignity and honour, and the propriety of our own conduct, require” (Smith, 1759 [1981], I, i, v, 26), much like a farsighted “planner” entering into conflict with short-sighted “doers” (Shefrin and Thaler, 1981). In social situations, the impartial spectator plays the role of a conscience, dispassionately weighing the conflicting needs of different persons. Smith (I, i, v, 29) recognized, however, that the impartial spectator could be led astray or rendered impotent by sufficiently intense passions: “There are some situations which bear so hard upon human nature that the greatest degree of self-government . . . is not able to stifle, altogether, the voice of human weakness, or reduce the violence of the passions to that pitch of moderation, in which the impartial spectator can entirely enter into them.”
Adam Smith’s psychological perspective in The Theory of Moral Sentiments is remarkably similar to “dual-process” frameworks advanced by psychologists (for example, Kirkpatrick and Epstein, 1992; Sloman, 1996; Metcalfe and Mischel, 1999), neuroscientists (Damasio, 1994; LeDoux, 1996; Panksepp, 1998) and more recently by behavioral economists, based on behavioral data and detailed observations of brain functioning (Bernheim and Rangel, 2004; Benhabib and Bisin, 2004; Fudenberg and Levine, 2004; Loewenstein and O’Donoghue, 2004). It also anticipates a wide range of insights regarding phenomena such as loss aversion, willpower and fairness (V. Smith, 1998) that have been the focus of modern behavioral economics (see Camerer and Loewenstein, 2004, for a recent review). The purpose of this essay is to draw attention to some of these connections. Indeed, as we propose at the end of the paper, The Theory of Moral Sentiments suggests promising directions for economic research that have not yet been exploited.
………………..
Related books:
The Theory of Moral Sentiments
The Wealth of Nations
The Authentic Adam Smith: His Life and Ideas
-
- Remembering ‘adam Smith’ - By Jason Zweig
Link to: Remembering ‘Adam Smith’George J.W. Goodman, known as Adam Smith to his readers and Jerry to his friends, died last month, age 83. But his work will outlive him for years, and quite likely decades, to come. Warren Buffett considers Jerry...
- This Day In Failure: September 20
I hadn't heard of this fact before: 1911: While beginning her fifth Atlantic crossing under the command of Captain E.J. Smith, the ocean liner Olympic collides with the HMS Hawke, punching a triangular hole eight feet by fifteen feet in...
- The Gutenberg Economy - By Michael Lewitt
Adam Smith is spoken of as the father of modern laissez faire capitalism, as well he should be. But the market system Smith described in The Wealth of Nations (1776) no longer exists. Instead, it has morphed into a system of fiat money that owes its existence...
- Paper: William D. Hamilton’s Work In Evolutionary Game Theory
Abstract William D. Hamilton’s impact on contemporary views of evolution has been nothing short of revolutionary, and his contributions to our reasoning on kin selection, genomic conflicts, parasitism and costs of sex dominate these fields. He also...
- Wsj: Peer Pressure And Other Pitches
Thanks to Will for passing this along. More businesses are using behavioral economics to appeal to customers, seeking to capitalize on the notion that people don't always act in their economic self-interest. Behavioral economics is popular among academics,...