Member Profile: Canadian Payroll Association

As the authoritative source of Canadian payroll knowledge, the Canadian Payroll Association (CPA) delivers programs and services that enable payroll practitioners, service providers and other business professionals to remain current with regulatory requirements, payroll technology and industry best practices.

The CPA holds more than 350 professional development seminars across Canada each year to address key payroll topics, from general to senior management levels.

With over 17,000 organization and individual members, CPA events are both excellent education and invaluable networking opportunities.








Contact Info:
Kristina Bruce, Regional Coordinator – Atlantic and Pacific Regions
1-888-729-7652 x128
Kristina.bruce@payroll.ca
www.payroll.ca 

Business Voice - March 2011


Did the New Economics Cause the Death of the Rational Consumer?

By Richard Woodbury

Given behavioral economics assumes people aren’t rational, it’s fair to ask whether the rational consumer ever existed in the first place.

Economics has long been known as the dismal science, but that perception is changing with the rise of behavioural economics, a branch that’s interested in the same questions and topics as standard economics. What separates behavioural from standard economics is that it doesn’t assume that people are rational, something standard analysis has long assumed.

It’s not difficult to find examples of people’s irrationality. Consider people’s response to global warming. Despite modest changes, most people aren’t taking significant steps to change their lifestyles to reduce their carbon footprint. The subprime mortgage crisis in the United States is another great example. The debt in 2009, an amount 2.5 times greater than in 1989.” At the end of 2009, the average debt-to-income ratios was 144.4 per cent. This marked a new record high. 

“We have many intuitions in our life and the point is that many of these intuitions are wrong,” says Dan Ariely. Ariely is a behavioural economist from Duke University and is the leading face of the behavioural economics movement.  He became interested in the subject after he developed the idea that humans repeatedly and predictably make the wrong decisions. He reached this conclusion after he did research on how to better deliver unavoidable painful treatments to hospital patients. This topic interested Ariely because when he was in high school, he sustained injuries in an explosion and suffered third degree burns to 70 per cent of his body.

BLAME CANADA
For an example closer to home, Canadians can look at household debt levels. The reality is our spending is out of control. A report by the Certified General Accountants Association of Canada released last year found “if household debt was to be spread evenly across all Canadians, each individual would hold some $41,740 in outstanding

UNDERSTANDING
With the right research, Ariely believes people can change some of their decision-making. Using a controlled lab environment, behavioural economists can undertake research to better understand human behaviour and human nature. “As a consequence of this different starting point, behavioural economists usually come to different conclusions about the logic and efficacy of almost anything, ranging from mortgages to savings to health care, in both the personal and business realms,” writes Ariely on one of his blog postings. 

Given behavioural economics assumes people aren’t rational, it’s fair to ask whether the rational consumer ever existed in the first place. Behavioural economist Mathieu Dufour says the use of the term ‘rational consumer’ is a misnomer.

 WHAT A LIFE
“Economists hijacked the notion of rationality when they created the maximizing robots that populate their models,” says Dufour, who is currently teaching at City University of New York. “Frankly, I’m not sure it’s rational to behave in the way most of these models describe, let alone as a ‘rational’agent. Could you imagine spending all your time consciously assessing costs and benefits? What a life.”

Dufour formerly taught at Dalhousie University and he says that if rationality is redefined as purposefully pursuing a goal in a logical way – in other words, by not being whimsical – then the behaviour observed by behaviour economists could be classified as being perfectly rational.

In his mind, Dufour would define a rational consumer as one that would try to maximize the satisfaction gained from what they purchased and they would only be constrained by their budget. This would mean the consumer would have knowledge of what sort of satisfaction the purchase would provide, they wouldn’t be enticed or fooled by an advertisement into purchasing it and they wouldn’t be making the purchase based on a spur of the moment decision. In other words, this is highly unlikely.

“Just with these three things, I think I have excluded everybody I know,” Dufour says. He adds that although people may act differently now than they did a few decades ago, that’s because human behaviour is grounded in history, culture and social settings.“The rational actor never existed, not in the form of a consumer, nor in the form of an investor,” Dufour says.

 The idea of the rational consumer was used in the past because economists assumed that when people did make mistakes, the market would correct them.

 THE MARKET GODS
“I always found the appeal to the market gods a bit odd,” writes Ariely on his blog. “Why would the market fix mistakes instead of aggravating them? When the Chicago economists sometimes (reluctantly) admits that people make mistakes, they claim that people make different types of mistakes that will eventually cancel each other out in the market. Behavioural economics argues that, instead, people will often make the same mistake and the individual mistakes can aggregate in the market.”

He uses the example of the subprime mortgage crisis to back this up.

“It isn’t as if some people made one kind of mistake and others made another kind,” Ariely writes. “It was the fact that so many people made the same mistakes and the market for these mistakes is what got us to where we are now.”

“It’s true that from a behavioural economics perspective we are fallible, easily confused, not that smart and often irrational. We are more like Homer Simpson than Superman.” – Dan Ariely

 BUILDING A BETTER WORLD
While behavioural economics may be perceived as a depressing look at human behaviour, it holds much promise for improving people’s lives.

“If we take some of the same lessons we’ve learned from working with our physical limitations and apply them to things that are affected by our cognitive limitations – insurance policies, retirement plans, and health care – we’ll be able to design more effective policies and tools that are more useful in the world,” Ariely writes. “This is the promise of behavioural economics – once we understand where we are weak or wrong, we can try to fix it and build a better world.

 

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