In this podcast, Seth discussed the concept of “synecdoche,” a figure of speech in which a term for a part of something refers to the whole.
Almost everything in our economic model is based on the rational actor concept. The concept asserts that individuals, with adequate information and seeking to maximize their interests, will make decisions according to the laws of economics.
Similarly, the decision-making model for an organization looks like this:
- When faced with a crisis, organizational leaders break down the problem and assign each part to the bureaucracy that already exists.
- Because of time and resource limitations, organizational leaders often settle on the first proposal that adequately addresses the issue, rather than evaluating all possible courses of action to see which one is most likely to work. This term is called “satisficing.”
- Organizational leaders gravitate towards solutions that limit short term uncertainty.
- Organizations often follow set repertoires and procedures when taking actions, rather than developing a new repertoire for the problem.
- Because of the large resource and time required to plan and mobilize actions within a large organization fully, organizational leaders effectively limit their actions to pre-existing plans.
The above model, and especially the last point, is the reason why organizations fail. When the world changes too much and too fast, the organization’s pre-existing methods no longer work because they need a new playbook.
As behavioral economics has pointed, we do not make a decision solely based on the rational actor model.
Just like organizations, we do not have just one voice inside of our head that is a rational actor. We also have many bureaucracies inside, all working at the same time with stereotypes and shorthands. We are moved by fear or greed, by the means we have seen before, and by the dreams we have for tomorrow. We get manipulated because we do not have a little person inside of us who is a rational, thoughtful, and long-term actor.
What this means is that our decision-making process like this:
- When faced with a crisis, we break it down and assign it to pre-assigned roles in our head.
- Because of time and resource limitations, we settle on the first proposal that adequately addresses the issue. Another word, we satisfice almost all the time.
- We gravitate towards solutions that limit short term uncertainty. That is behavioral economics in a nutshell.
- We follow set repertoires and procedures when taking actions. We often find ourselves in a rut and doing it the same way. That is called a habit.
- Because of the large resources, time, and fear required to mobilize actions fully, we essentially limit ourselves to pre-existing habits.
In summary, we are not rational actors as we hope. Inside of us is an organization with a process and many voices. Those voices in our head are busy doing their jobs, and their actions get displayed on the outside. We, like an organization, are just the sum of all of our voices inside our head.