For centuries, classical economists have explained human behaviour in rationalist terms. Humans are described as “homo economicus” – economic man – who make rational decisions that maximise their utility. Under this assumption, policymakers would design policies that increase the general welfare. But if this is true, why do policymakers in Nigeria, and those whose decisions could affect the country’s future, tend to behave irrationally? Why is positive economic and political change so difficult in Nigeria? Well, behavioural economists have the answer: humans tend to behave irrationally!
But why? For answer, we should first explore further the rationalist perspective. This is the foundation of classical economic thought that dates back several centuries. Although, today, behavioural economics, a new field that draws on human psychology, has challenged the rationalist assumptions, but before behavioural economists came on the scene, it was all about the rationalist assumptions.
The first definition of homo economicus was proposed by John Stuart Mill in the 19th century. JS Mill defined the economic man as one “who inevitably does that by which he may obtain the greatest amount of necessaries, conveniences and luxuries with the smallest quantity of labour and physical self-denial with which they can be obtained.” This idea of someone acting in his economic self-interest chimes with the works of Adam Smith and David Ricardo, both classical economists, who considered man to be a rational, self-interested economic actor, who seeks to maximise his utility.
Talk of the right information, knowledge and ideas, the Buhari administration lacks them. Hence, it can’t make rational decisions that would increase general welfare
Now, let me say that I am still of the rationalist school. I mean, if I can get the best outcomes with minimum efforts, that’s the option I would prefer. If I can maximise my gain and minimise my loss, that’s the rational thing to do. Who would buy something and pay the highest price for it if he or she can pay less? Who does not want a flourishing economy? Who does not want a stable political environment? Who does not want a prosperous society? These are utility-maximising preferences that the economic man, the rational man, is expected to choose.
Yet, all that said, it’s difficult to ignore evidence of decisions that are truly irrational. And, thus, it’s hard to ignore insights from behavioural economics which tell us why humans may behave irrationally, why they may not make decisions that would maximise their utility, that would generate economic prosperity, and that would engender political stability and social cohesion. So, let’s consider why, from behavioural economics point of view, Nigerian policy and decision makers are not behaving rationally to move the country forward.
The behaviour economists’ first criticism of the rationalist school is on the assumption of perfect information. To act rationally, one needs the right information. For instance, you can only pay the right price for a product if you have information about comparable prices, i.e., how much that product is sold elsewhere. Without comparable prices, the likelihood is, if you can afford it, you will pay whatever price you are offered instead of acting rationally by paying the most reasonable price. Which is why market information is a great asset!
But pure rationality assumes perfect information. However, behavioural economists disagree with the assumption of perfect information. We live in a world of imperfect information. Thus, instead of pure rationality, behavioural economists talk of “bounded rationality”, that is, rationality bounded by imperfect information. Your decision to make rational decisions is limited by your knowledge, by what you know!
Now, information or knowledge here includes ideas. For instance, scholars have found that policymakers that design sensible policies and leaders that make sensible decisions are those that are exposed to the best possible ideas. Which is why successful leaders surround themselves with the brightest and the best. They want brilliant people around them.
But Nigeria suffers from the worst form of bounded rationality. Its leader, President Buhari, knows next to nothing about economics and probably has the most non-technocratic cabinet in Nigeria’s history, a cabinet made up of career politicians, leading a non-technocratic civil service. So, talk of the right information, knowledge and ideas, the Buhari administration lacks them. Hence, it can’t make rational decisions that would increase general welfare; decisions that, according to welfare economists, must entail free trade, investment liberalisation, privatisation and, generally, open and competitive markets!
Well, even if there is no shortage of information, knowledge and ideas, behavioural economists argue that humans may still not behave rationally because of cognitive bias. So, President Buhari may have the best economic advice, but what if he doesn’t believe in free trade, what if he doesn’t believe in open markets? What if he believes in the power of the state, in government intervention and control the economy? So, cognitive bias is another reason why policy and decision makers may not act rationally to increase general welfare. And that’s a major problem of the Buhari government. As a result, the government makes inter-temporal choices that have consequences on future economic development, that discourage foreign investors from coming to Nigeria, which dampen business dynamism.
Another reason why humans may not make rational decisions is derived from prospect theory and is linked to the concept of loss aversion. Behavioural economists define loss aversion as a situation where the fear of losing something is stronger than the hopes of gaining something. An illustration is that one would notice the sting of losing $100 in a game for longer than he or she would feel happiness over winning $100. And because people are consistently concerned about losses, they also exhibit a “status quo bias” in decision-making, which means they will violate the assumptions of rational decision-making.
This loss aversion argument is most applicable to political reform in Nigeria and best explains why there is resistance to political change. Why, for instance, is the North resistant to the idea of political restructuring? Despite the fact that the North would benefit from a restructured and decentralised Nigeria, why are they opposed to restructuring? Well, the answer is they are loss averse; the fear of losing what they already have is felt much more strongly than the hopes of gaining even much more.
Recently, Professor Pat Utomi said that some northern politicians are afraid of restructuring because “they are uncertain about where it would lead them”, adding that the North largely relies on the federal government for revenues, which “has made them really unproductive.”He went on to say that the North would actually benefit from restructuring because it would help them “become productive and move away from the poverty status.”
Let’s face it, the North needs reconstruction, it needs some form of a Marshall Plan, that post-World War II financial and economic mobilisation that helped rebuild a devastated Western Europe. The North needs something like that. But it’s only if the North becomes autonomous regional governments, under a restructured and devolved Nigeria, that it can mobilise internal resources and external help for such reconstruction. It can’t do it under a centralised Nigeria where it’s an appendage of an over-powerful Federal Government and relies on it for financial handouts! So, rationally, the North should support restructuring. But, as behavioural economics suggests, loss aversion is preventing it from seeing the opportunities.
Myopic time horizon is another reason people don’t behave rationally. Of course, that’s also why the North doesn’t support restructuring and why President Buhari doesn’t undertake far-reaching economic and political reforms. Leaders who have visions of the future would make decisions today that would yield great benefits tomorrow. But leaders who lack a strategic vision of the future tend to be risk averse and myopic in decision-making.
So, while Nigerian leaders should behave rationally to move the country forward, they are not because of bounded rationality, cognitive bias, loss aversion and myopic time horizon. And thanks to all these, transformational change eludes Nigeria!
