We are not perfectly rational. This is obvious to anyone who has eaten more than their fill, exchanged harsh words with a friend, or taken the wrong turn on their morning commute. Less obvious, though, are the ways in which our thoughts, feelings and choices are systematically biased. Behavioural economics, a field that bridges insights from social psychology, cognitive science and economics, emerged in recent decades to explain the constraints on human rationality – uncovering a still-growing list of biases and heuristics, or mental shortcuts. Behavioural economists have also harnessed research findings to improve judgment and decision-making through simple interventions (often called ‘nudges’).
Though the field’s discoveries are genuinely novel, its intellectual influences run deep. Its founders drew inspiration from the 20th century’s most famous theorist on the irrational unconscious: the founder of psychoanalysis, Sigmund Freud. The notable convergences between Freud’s ideas and behavioural economics are a testament to the durability of theories that divide thinking into two processes. Their divergences point to the distinct historical and political moments in which these psychological paradigms surfaced. Freud and behavioural economists have picked up on something distinct, maybe even intrinsic, about the way we think – but they have done so with very different emphases and to describe disparate realities.
As articulated in the psychologist Daniel Kahneman’s book Thinking, Fast and Slow (2011), the prime behavioural economic model of cognition is divided into two systems, which he calls System 1 and System 2. System 1 is largely unconscious, fast-acting and instinctive, while System 2 is mostly conscious, slow and logical. System 1 is more primitive and automatic than System 2, determining most of our behaviours, whereas System 2 requires more effort and cognitive capacity, providing guidance and restraint when activated.
Kahneman notes that these systems are in perpetual conflict, as System 2 is tasked with overriding the impulses of System 1. Consider the bat-and-ball problem: ‘A bat and ball cost $1.10. The bat costs $1 more than the ball. How much does the ball cost?’ When an individual is presented with this problem, System 2 must override System 1’s intuition that the answer is 10 cents. Though it takes only a little mental mathematics to calculate the correct response (5 cents), Kahneman reports that half of undergraduates from Harvard, MIT and Princeton who were asked the question offered the System 1 response. The example seems to demonstrate students’ momentary failure to override their System 1 impulses. That mental check requires considerable cognitive effort – effort that Kahneman considers a scarce resource. The behavioural economic model of the psyche is characterised by a ‘division of labour’ between the two systems, which allocate cognitive resources to minimise effort and optimise outcomes.
As some psychoanalysts have noted, this dual-systems concept is strikingly reminiscent of Freud’s thinking on the dual nature of mental processes. Freud divided cognitive processes into two modes of representation: primary process and secondary process. Primary process is largely non-verbal and unconscious; it is evident in fantasies and dreams, and is governed by pleasure. In contrast, Freud described secondary process as logical, deliberative and constrained by reality. He suggested that these processes are associated with mental agencies – the well-known id, ego and superego – that are in constant conflict in a battle for psychic dominance. If our ids (characterised by primary process) drive us to eat cake for dessert, our egos (characterised by secondary process) might rein us in and lead us to choose fruit instead.
Behavioural economists have, like Freud, attempted to understand mental life by examining deviations from normal or adaptive functioning. Using laboratory experiments, behavioural economists observe systematic errors in individuals’ responses to arrive at their biases and heuristics. For example, researchers have found evidence that people inaccurately predict what their preferences would be in emotionally intense situations – reflecting a ‘hot-cold empathy gap’ – and that people are biased toward the status quo when making decisions.
The resemblance between defence mechanisms and biases and heuristics is unmistakable
Freud was similarly interested in errors that became called parapraxes or slips of the tongue: he carefully documented his patients’ verbal errors, bungled actions or memory failures. He argued that these mistakes betrayed his patients’ defence mechanisms – the strategies that people unconsciously use to ward off anxiety related to their unconscious wishes. For instance, when a patient consistently forgets and misses her therapy sessions, the psychoanalyst might wonder if there is something about therapy that feels threatening. Perhaps the analyst reminds the patient of a traumatising early caregiver. This memory failure serves as a starting place by which the analyst might probe and interpret the patient’s underlying fears and worries.
The resemblance between defence mechanisms and biases and heuristics is unmistakable. The behavioural economic choice-supportive bias – or the tendency to retroactively describe decisions as optimal, and the alternative options as inferior – relates to the Freudian defence of rationalisation – when one convinces oneself that conflicts or negative events are justified or even preferable. Later psychoanalysts would go on to codify Freud’s defence mechanisms, much like many researchers have gone on to describe new biases and heuristics.
It is no coincidence that Freud’s metapsychology and behavioural economic models contain parallels. In Kahneman’s 2002 Nobel Prize autobiographical sketch, he cited the Freudian ego psychologist David Rapaport, as well as his year spent at the psychoanalytic Austen Riggs Center, as critical to his scholarly development. At Austen Riggs in 1958, Kahneman studied a chapter of Freud’s canonical text The Interpretation of Dreams (1899) ‘like a Talmudic text’, informing his theorising about cognition. Another leader in behavioural economics, George Loewenstein, is the greatgrandson of Sigmund Freud and the son of Sophie Freud Loewenstein, who wrote on Freud’s theory of the mind throughout her career. George Loewenstein’s interest in ‘drive states’ (eg, the sexual drive) as well as defence mechanisms such as projection – the tendency to attribute one’s own feelings or characteristics to others – could be viewed as extensions of Freud’s research agenda.
To be sure, behavioural economics departs from Freud’s theories in important ways. Though Freud was trained as a neurological researcher, he derived many of his hypotheses through his clinical work. Since his death nearly a century ago, psychological research has advanced methodologically. Behavioural economists benefited from these developments, conducting their work largely through controlled experiments. As Freud’s groundbreaking contributions have been clarified, extended or supplanted using more rigorous research standards, behavioural economists have applied their insights to various domains, including dietary decisions, retirement savings, and even mental health treatment.
Behavioural economics has enriched our understanding of decision-making problems. Yet, where the field diverges from Freudian psychology is also one place where it stands to gain. Freud and his followers were attentive to the ways in which early life indelibly informs our present. The behavioural economics literature lacks a deep exploration of how developmental processes might influence our judgment and decisions. Studies from outside the field have demonstrated associations between factors such as parenting style and childhood unpredictability, and adult decisions and wellbeing – findings that would likely be of interest to behavioural economists.
That Freud understood much of mental life as textured by our early caregiving relationships, and that behavioural economists understand much of mental life as a highly individual experience, makes sense considering when these disciplines emerged. Freud began writing in Austria at the end of the 19th century, when Europe was gripped by industrialisation and urbanisation. Cities witnessed a rise in economic growth and declines in infant and child mortality rates. It has been argued that increased educational attainment offered the middle class and even some wage-earning families opportunities to rise in the social ranks, reorienting them to invest in children, who would be parents’ ticket to economic opportunity. Changes such as these likely reinforced the role of the family as both an important economic unit and a site of psychological interdependence.
‘Nudges’ to increase individual retirement saving, for example, have garnered interest as fewer firms offer pensions
Amid these political-economic transformations, psychoanalysis was born. So, too, was Freud’s notion that one could draw a connection between people’s life histories, especially their romantic partners, and a ‘single source’: their mothers. In light of modern empirical research – on the impact of childhood economic conditions on cognitive, emotional and social development, for instance – Freud seems to have underestimated how social conditions and other factors shape our thinking. Freud’s turn inward to the nuclear family unit exposes the constraints of a psychological theory produced by a bourgeois Viennese at the turn of the previous century.
Behavioural economics, for its part, arose in the era of neoliberalism – a period of high economic inequality, erosion of public services, and widespread low-wage work. Meanwhile, marriage rates have declined, as has participation in community groups such as labour unions, religious institutions and other civic associations. At a time when many individuals have had to compete on the market with an inadequate safety net, behavioural economics entered the scene with the promise of curbing our decision errors and deviations from utility-maximising models. ‘Nudges’ to increase individual retirement saving, for example, have garnered interest as fewer firms offer pensions, which once ensured workers economic security in old age.
Behavioural economics might play a part in narrowing the realm of what’s possible in an already politically and economically constrained landscape. Loewenstein has explored these potential spillover effects: in one study, nudges provided participants ‘false hope’ that small individual decisions, rather than collective measures, would be sufficient to solve the climate crisis. As the behavioural economist Eldar Shafir put it in The New York Times in 2016, the field reflects the world from which it has materialised, and ‘its popularity no doubt comes from a combination of lack of funds and political helplessness.’
What the parallels and divergences between behavioural economics and Freud’s ideas illustrate is that theories of the mind (and the discourse that surrounds them) are shaped and limited by their historical contexts. Freud and the behavioural economists alike have arrived at what might be a core insight about human cognition: its duality. But it would be overly optimistic to imagine that one paradigm can ever fully illuminate the intricacies of motivation, judgment and decision-making that transcend time and space. Perhaps the drive to do so can be added to the long list of human irrationalities.