Are the Human Mind and Emotions a Taboo or the Last Frontier in Economics?

Consulting Fellow, RIETI

"The human mind and emotions are the last frontier of science."

This is what Yoshihiko Tanno, a clinical psychology professor from the University of Tokyo, writes at the beginning of his book Evidence-based Clinical Psychology .( note 1 ) A noted economist Hirofumi Uzawa, while touching upon the importance of the human mind in economics writes that, "Bringing the human mind into economics has been considered a kind of taboo."( note 2 ) In what follows, I would like to discuss the emotion of anxiety and attempt to approach this taboo, building upon recent findings in the fields of psychology and behavioral economics.

Anxiety hypothesis

The hypothesis discussed below (anxiety hypothesis) maintains that behavior of human beings becomes irrational and excessively risk-averse when they feel anxious.

Many economic theories have been developed based on the concept of homo economicus, that is, all humans are rational, self-interested actors. It has been found, however, that people's decision-making in the real world is often irrational, showing behavioral patterns that contradict the predictions of expected utility theory, a typical theory based on the assumption of human rationality. Furthermore, recent psychological studies have begun to promote the hypothesis that such irrational human behavior is driven by human emotions.( note 3 )

There are two processes through which people's subjective assessment of a risk deviates from the rational assessment of the risk, hence, resulting in excessively risk-averse behavior. The first process is "overestimation," a situation in which an actor overestimates the likelihood of occurrence for a negative incident. To give a specific example, a certain individual may believe that there is a 0.09% chance of dying in a plane accident even though the objective probability for such a death is only 0.0009%. The second process is "overweighting" illustrated by Tversky and Kahneman in prospect theory.( note 4 ) Overweighting refers to people's general tendency to overweight small probabilities and underweight moderate probabilities in their subjective assessment of incidents for which the objective probability of occurrence is known. The prospect theory describes this tendency as a probability weighting function (see figure 1 for an example). For instance, suppose there is a special gun that can be loaded with 1,000 bullets. Now, let's say that you handed that fully loaded gun to someone and told him that if he had to point the gun at his thigh and pull the trigger just once (in other words, to hit his thigh with that bullet with 100% certainty), how much he would pay to avoid that outcome, to which he responds that he would pay 100 million yen. Next, assume we play three versions of Russian roulette with that same gun, with the only difference being the number of bullets loaded into the gun for each version would be one, 10, and 100 respectively. You would then ask the same question: how much one would pay to avoid pulling the trigger just once. According to the expected utility theory, the amount of money the person would be ready to pay to avoid the Russian roulette scenario would be 100,000 yen (= 100 million yen x 1/1000) if the gun was loaded with just one bullet, 1 million yen (= 100 million yen x 10/1000) for 10 bullets, and 10 million yen (= 100 million yen x 100/1000) for 100 bullets. But very different results can be obtained with a probability weighting function. Since a lower probability tends to be overestimated, the person might be ready to pay as much as 840,000 yen to avoid the game if the gun was loaded with just one bullet, 1.19 million yen for 10 bullets, and 1.38 million yen for 100 bullets.( note 5 )

Figure 1: Subjective assessment of the likelihood of occurrence for a negative incident using a graph representing a probability weighting function Figure 1: Subjective assessment of the likelihood of occurrence for a negative incident using a graph representing a probability weighting function

Psychological research has found that overestimation and overweighting of probabilities are closely linked with negative feelings, particularly the feeling of anxiety. "Anxiety" as referred to here has two meanings, namely, anxiety as an "incidental emotion" that happens to be felt at a given point of time and anxiety as an "anticipatory emotion" that has been induced by an encounter with a certain incident or information.( note 6 ) Earlier research has found that people with a greater sense of incidental anxiety tend to overestimate the likelihood of occurrence for an undesirable incident compared to those with a lower sense of incidental anxiety.( note 7 ) Meanwhile, regarding anticipatory anxiety, findings in other research suggest, based on an experiment on how much people are willing to pay to avoid an electric shock, that people's tendency to overestimate (or overweight) the risk of a small-probability event is greater when the event is anxiety-evoking than when it is not.( note 8 )

Based on these research findings, we can suggest the following: in a situation where the risk of a certain negative event occurring to Person A exits even though the likelihood of occurrence is extremely low at X 1 % and if the event is anxiety-evoking for Person A or if Person A happens to have already been having some sort of anxiety, Person A would overestimate the probability of this negative event to be X 2 % and then overweight this already overestimated probability, resulting in the subjective estimation of X 3 % ( figure 1 ). In this case, Person A subjectively believes that this particular negative event would occur at the probability of X 3 %, well above the objective probability of X 1 %, whereby he or she would exhibit behavior that is more risk-averse than would be assumed for a rational actor in the expected utility theory.

Phenomena that can be explained by anxiety hypothesis

There are many phenomena that can be explained by anxiety hypothesis. For example, it is still fresh in our minds that the food poisoning case in Japan involving Chinese-made dumplings resulted in a sudden decline in food imports from China. As some experts point out, the risk associated with eating Chinese-made food and food products in general is extremely low. A sharp decrease in food imports is difficult to explain unless we look at it from anxiety hypothesis or similar approach. The same can be said for deviations between experts' views on the safety of nuclear power generation and perceptions held by the general public as well as for people's reactions to diseases such as mad cow disease. A phenomenon characterized by a deviation between "safety" and a "sense of security" - i.e. a situation where people become excessively risk-averse as they are unable to be reassured even if experts say it is safe or the risk is extremely low - can be explained by using anxiety hypothesis.

Actually, economic recession can be explained in the same manner. If anxiety drives people to overestimate the likelihood of losing their jobs and the potential negative impact resulting from joblessness pushes them to become thrifty and cut back on their spending, this ultimately leads to a decrease in overall demand and an economic downturn. A similar mechanism may be at work for such phenomena as a contraction of corporate investments and credit tightening by banks.

In the same manner, the social loss resulting from people's emotional anxiety is enormous.

Cognitive therapeutic approach to problems resulting from anxiety

How can we address problems resulting from anxiety, for instance, the economic doldrums the world is in today? Many economists seem to believe that reforming public systems, such as social welfare and pension systems, is the way to eliminate people's anxiety.

However, people's emotions can be changed without tinkering with public systems though this is unknown to or considered taboo by economists. From the later half of the 20th century and particularly following the development of a treatment method called cognitive therapy, it became possible to turn negative emotions into positive emotions without using drugs.

The basic idea of cognitive therapy is very simple and commonsensical. The idea is that people's negative emotions are induced by believing negative thoughts. For instance, people who believe the thought that they are going to lose their jobs would begin to feel anxious and those who believe the thought that their life is over would begin to develop a feeling of hopelessness. In most cases, thoughts inducing negative emotions are unrealistic. Thus, as a way to alleviate patients' anxiety and other negative emotions, cognitive therapy seeks to reduce the degree to which they believe their negative thoughts by questioning whether their negative thoughts are really well grounded and whether any evidence exists to counter their thoughts. As some readers may have noticed, thoughts behind people's emotions are very akin to "expectations" in economics. For instance, if many people believe the thought that the economy will not improve, they tend to feel a sense of gloom and anxiety. The "thought" referred to here functions as an "expectation" in the context of economics and this thought (expectation) sends the economy into recession. So, linking economics and cognitive therapy is much easier than might have been thought.

Daily exercise-like cognitive therapy as a tool to revamp the economy

Suppose that cognitive therapy can be arranged into something like a very simple and easy daily exercise so that anyone, including people not suffering from any clinical emotional disorder, could do it on a daily basis. If realized, not only would this help prevent people from committing suicide and developing emotional disorders such as depression, but it could also make people more optimistic about their future, which in turn could lead to an economic recovery. That is, we might be able to solve multiple social problems all at once.

Unfortunately, as far as I know, the world of academia has not so far successfully developed an easy and simple method that is accessible to the public, including those having no clinical emotional problems, and can be described as a "daily exercise-type of cognitive therapy." However, outside the world of academia, there exist some potentially viable options. A method called The Work of Byron Katie is one example.( note 9 ) Developed by an American woman named Byron Katie, who is neither a psychologist nor a psychiatrist but who used to suffer severe depression, the method seeks to alleviate negative emotions through "the Work," a process consisting of four questions and "the turnaround." I have taken to practicing "the Work" on a regular basis and I can testify through first-hand experience, that my negative feelings lessen by doing the Work. So, when we look around in various directions without being constrained by academic boundaries, we can see that there already exist some methods that are potentially workable as a daily exercise-type of cognitive therapy.


"The only thing we have to fear is fear itself," said U.S. President Franklin D. Roosevelt in his inaugural address upon taking office in 1933 in the midst of the Great Depression. Unfortunately, there was no effective method to reduce people's fear and anxiety in the era of FDR and the Great Depression was solved by the tragedy of World War II. Since then, remarkable progress has been made in the development of methods for alleviating fear and anxiety. At the moment, the use of such methods seems to be perceived as taboo by both economists and policy makers and the current atmosphere does not allow for the effective use of these methods beyond the boundaries of treatment for emotional disorders. However, in order not to repeat the tragedy of the Great Depression, we need to explore the world of the human mind and emotions by defining them as the last frontier of economics and/or social policies instead of perceiving them as taboo.

February 9, 2010
  1. Yoshihiko Tanno, Ebidensu rinsho shinrigaku [Evidence-based Clinical Psychology: Forefront of cognitive and behavioral theory], Nippon Hyoronsha Co. Ltd., 2001.
  2. Hirofumi Uzawa, Keizaigaku to Ningen no Kokoro [Economics and the Human Mind], Toyo Keizai, Inc., 2003.
  3. A leading example of this kind of hypothesis is risk-as-feelings hypothesis proposed by Lowenstein, et al. See George F. Loewenstein, et al., "Risk as Feelings," Psychological Bulletin, Vol. 127, No. 2 (2000), pp. 267-286.
  4. Daniel Kahneman and Amos Tversky, "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Vol. 47, No. 2 (March, 1979), pp. 263-291; and Amos Tversky and Daniel Kahneman, "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Vol. 5, No. 4 (October, 1992), pp.297-323.
  5. These figures are not based on an actual experiment but have been calculated by assigning the value of 0.3 to γ in the probability weighting function provided on p.309 of "Advances in Prospect Theory."
  6. Lowenstein et al., "Risk as Feelings."
  7. Bret G. Bentz, Donald A. Williamson, and Cheryl F. Smith, "The Prediction of Negative Events Associated with Anxiety and Dietary Restraint: A Test of the Content Specificity Hypothesis," Journal of Psychopathology and Behavioral Assessment, Vol. 21, No. 2 (June, 1999), pp.97-108.
  8. Yuval Rottenstreich and Christopher K. Hsee, "Money, Kisses, and Electric Shocks: On the Affective Psychology of Risk," Psychological Science, Vol. 12, No. 3 (May 2001), pp. 185-190.
  9. Byron Katie, Loving What Is: Four Questions That Can Change Your Life, Three Rivers Press, 2002.

February 9, 2010

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