Economics Isn't What You Think It Is

A Journey from Numbers to Human Nature

6/1/20255 min read

black android smartphone turned on screen

Introduction:

For years, I dismissed economics as a dry subject filled with charts, graphs, and complex mathematical formulas that seemed disconnected from real life. Like many people, I thought economics was just about money, markets, and mind-numbing statistics. But then I stumbled upon a simple definition that completely changed my perspective: economics is the study of choice in scarcity 1. Suddenly, everything clicked. This wasn't just about numbers—this was about understanding how people make decisions when they can't have everything they want.

The Real Heart of Economics: Choice and Scarcity

Economics fundamentally addresses a universal human problem: we live in a world where our wants and needs are unlimited, but our resources are finite . Whether you're deciding how to spend your weekend, a government allocating its budget, or a company choosing which products to develop, you're engaging in economic thinking. Every choice involves trade-offs—economists call this opportunity cost, which is the value of what you give up to get something else.

This concept of scarcity isn't just about money. It's about time, attention, energy, and even emotional bandwidth. When you choose to binge-watch a series on Netflix, you're giving up the opportunity to read a book, exercise, or spend time with friends. Economics studies these decisions and tries to understand the patterns behind them.

The mathematical representation of how people value different choices is captured in something called a utility function. Think of utility as a measure of satisfaction or happiness you get from consuming goods or services. A utility function might look something like this: U(x,y)=x0.5⋅y0.5U(x,y) = x^{0.5} \cdot y^{0.5}U(x,y)=x0.5⋅y0.5, where x and y represent different goods, and the function shows how much total satisfaction you'd get from different combinations of them. It's essentially a way to quantify preferences—brilliant, right?

The Traditional Economic Mind: Meet Homo Economicus

For decades, traditional economics built its theories around a fictional character called "homo economicus"—economic man. This theoretical person was assumed to be perfectly rational, always self-interested, and capable of processing unlimited information to make optimal decisions. Traditional economic theory assumed people have stable preferences, always want more rather than less, and make decisions by carefully weighing costs and benefits.

Under this framework, if you're choosing between two job offers, you'd systematically evaluate every factor—salary, benefits, commute time, growth opportunities—and select the option that maximizes your overall utility. The theory suggests you'd never make decisions based on emotions, social pressure, or cognitive limitations.

These assumptions enabled economists to create elegant mathematical models and make predictions about market behavior. The rational choice theory became the foundation for understanding everything from consumer behavior to financial markets. It was clean, predictable, and mathematically beautiful.

Enter the Rebels: Behavioral Economics Challenges Everything

But then came the rebels. In the 1970s and 1980s, psychologists like Daniel Kahneman and Amos Tversky began conducting experiments that showed something startling: people don't actually behave like the rational economic man. Instead, they found that humans are systematically irrational in predictable ways.

Behavioral economics emerged as a field that combines psychology with economics to understand how people actually make decisions, not how they should make decisions according to traditional theory. The findings were revolutionary and somewhat humbling for the economics profession.

Consider this example from prospect theory: If I offer you a guaranteed $500 or a 50% chance to win $1,000, which would you choose? Traditional economics says both options have the same expected value ($500), so a rational person would be indifferent. But behavioral economics discovered that most people prefer the guaranteed $500 because we feel losses more intensely than equivalent gains—a phenomenon called loss aversion.

The Predictably Irrational Human

One of the most accessible introductions to these concepts comes from Dan Ariely's book "Predictably Irrational". Ariely's research reveals that while humans are indeed irrational, our irrationality follows predictable patterns. We consistently make the same types of mistakes in similar situations.

For instance, Ariely demonstrates the power of relativity in decision-making. We rarely evaluate options in absolute terms; instead, we compare them to available alternatives. This is why retailers often introduce a "decoy" product—an option that's clearly inferior to their preferred choice—to make that preferred option look more attractive by comparison.

Another fascinating finding is that our decisions are heavily influenced by the context in which choices are presented18. The same decision can lead to different outcomes depending on whether it's framed as a potential gain or a potential loss. This insight has profound implications for everything from public policy to marketing strategies.

Why This Matters: From Theory to Real Life

Understanding behavioral economics isn't just academic curiosity—it has practical applications everywhere. Companies use these insights to design better products and services. Governments apply behavioral economics principles, known as "nudging," to encourage beneficial behaviors like retirement saving or healthy eating. Even individuals can use this knowledge to make better personal decisions by recognizing their own cognitive biases.

The field has also revolutionized our understanding of financial markets. Traditional finance theory assumed that markets are efficient and that prices always reflect all available information. Behavioral finance shows that markets are influenced by investor psychology, leading to bubbles, crashes, and other phenomena that purely rational models couldn't explain.

The Journey Continues: Economics as Human Story

What I've discovered is that economics isn't really about numbers at all—it's about stories. Stories about how humans navigate a world of infinite wants and finite resources. Stories about how we make decisions under uncertainty, how we interact with others, and how our psychological quirks shape the world around us.

The beauty of behavioral economics lies in its recognition that humans are wonderfully, predictably imperfect. We're not calculating machines; we're emotional, social beings who use mental shortcuts, get influenced by irrelevant information, and sometimes make choices that seem to contradict our own best interests. And that's exactly what makes us human.

Conclusion: Reframing Economic Thinking

Economics has evolved from a discipline that tried to reduce human behavior to mathematical equations into one that embraces the beautiful complexity of human nature. By acknowledging that people are predictably irrational rather than perfectly rational, we've gained deeper insights into how the world actually works rather than how we think it should work.

Whether you're interested in understanding consumer behavior, making better personal decisions, or simply curious about what drives human choices, economics—particularly behavioral economics—offers a fascinating lens through which to view the world. It's not about memorizing formulas or analyzing abstract market forces; it's about understanding the very human drama of choice, preference, and decision-making that plays out millions of times every day around the globe.

The next time someone tells you economics is boring, remind them that it's actually the science of human choice—and there's nothing more fascinating than understanding why we do what we do.

Citations:

Connect

afateh@me.com