Episode 467: Vernon L. Smith
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Understanding Human Behavior in Economics
Much of the field of economics derives its theories from a subset of Adam Smith’s philosophy found in the Wealth of Nations. But are economists overlooking other parts of Adam Smith’s teachings that could explain more about human behavior and economics?
Nobel-prize winning economist Vernon L. Smith is an emeritus professor of economics and law at Chapman University. His books like Rationality in Economics: Constructivist and Ecological Forms and Humanomics: Moral Sentiments and the Wealth of Nations for the Twenty-First Century explore how human behavior shapes economics.
Vernon and Greg discuss the role Adam Smith’s Theory of Moral Sentiments plays in understanding behavioral economics, Vernon’s early supply and demand experiments, and how his work shaped the field of experimental economics.
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Episode Quotes:
Do humans learn economics through experience not theory?
39:09: People don't get the economics right by thinking about it. They get it right by actually participating in markets and getting a feel for what's going on. And I argue that humans are very good, once they do that. Sure, they can be fooled. And they do a lot of crazy things in a new market before they've acquired experience, but they adapt very well. And so, that equilibrium concepts are relevant. But the behavior is very much experience-oriented. And so, they get there through experiential learning. You see more than just abstract analysis and thinking about it.
Perspective is at the foundation of the theorem of moral sentiments
12:29: [The relationship] Perspective is at the foundation of the Theory of Moral Sentiments. That's what he's [Adam Smith] talking about—sentiments. An important part of it is fellow feeling.
Gratitude influences sacrifice and motivates cooperation
48:16: Gratitude creates indebtedness. And so people may have self-interested motivations, but they also have this motivation to get along with others. And so this proposition predicts, in the trust game, that people are sacrificing; they're taking less reward in order to do what they believe is right, to treat this person.
Why is Vernon championing Adam Smith’s principles in the modern way of thinking about economics?
56:45: So that's why I'm a champion of trying to get that pattern of thinking and Adam Smith's principles into the modern way of thinking in economics. Economics and psychology, and in economics, because the Theorem of Sentiments was a contribution to social psychology that just never took hold. It was another hundred years, you see, before psychology started to do anything. And it was the beginning of the 20th century before psychology became very prominent. And then it was individual psychology, not social psychology. I think Adam Smith would find that strange.
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Faculty Profile at Chapman University
His Work:
Economics of Markets: Neoclassical Theory, Experiments, and Theory of Classical Price Discovery
Rationality in Economics: Constructivist and Ecological Forms
Humanomics: Moral Sentiments and the Wealth of Nations for the Twenty-First Century
A Life of Experimental Economics, Volume I: Forty Years of Discovery
A Life of Experimental Economics, Volume II: The Next Fifty Years