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The Counterattack of Behavioral Economics (MBA Version)

#MBA #Counterattack #Behavioral #economics

Can you imagine which classrooms in an MBA program hold the most contentious debates? You may be thinking of marketing, or management strategy, or leadership . . . at our school, however, the answer is “economics.” You may think I’m joking, but I’m not. This is what one might call “the counterattack of economics.” The term “economics” surely brings up an image of the demand curve and the supply curve, difficult mathematical functions and formulas. However, our behavioral economics course is a very different thing indeed.

The premise of economics that focuses on human behavior is that, when it comes to money, people do not display logical behavior. Traditional economics hypothesizes the homo economicus, the “rational economical individual.” Meanwhile, behavioral economics uses concrete cases to pursue the true nature of humans, that is, their inability to act rationally. Examples follow.

  • On the day of a concert, you notice that you have lost the concert ticket that was in your pocket. Would you spend 10,000 yen to buy another ticket?
  • On the day of a concert, you noticed that you have lost a 10,000 yen bill that was in your pocket. Would you spend 10,000 yen to buy a concert ticket?

Did you answer “No” to the first question, and “Yes” to the second question? Since in both cases, your total monetary expenses would be 20,000 yen, your answer to both questions should be the same, either “Yes” or “No.” Yet we seem to be bound to some kind of “mental (cognitive) calculation,” whereby we make a distinction in our minds between a lost ticket and lost money. In other words, we don’t think completely rationally (I am indebted to Professor Iwasawa for this example). In the same way, companies cannot escape a variety of biases (economic trends, the mood in their industry, etc.) when making a decision regarding a merger and acquisition deal or a capital investment. Said biases can lead to mistakes being made, and even failure, as we all know. One conclusion we can make from behavioral economics as taught in an MBA education course can be expressed as follows: “Superior managers are lonely and independent.” What follows? Let’s meet up in the behavioral economics classroom and find out!