Ernst Fehr: Uncertainty can be mastered–by using the right tools
Global migration, climate change, technological upheaval - these developments are unsettling major challenges for politics and business today. In an interview with the GDI, one of the world's most influential economists, Ernst Fehr, explains what it takes to win people's trust in these times.
GDI: Professor Fehr, in January the Academy of Behavioral Economics will be held under the title "Trust and Facts: Better Decisions in an Age of Growing Populism". What can you imagine by this, what will it be about?
Ernst Fehr: We are living in a time in which decisions in the political, but also in the entrepreneurial context are increasingly fraught with uncertainty. Climate change, global migration, Brexit and the associated uncertainties on the financial market are some examples. But rapid technological change and many other challenges are also making people, companies and politicians increasingly uncertain about the future. So the question is whether organisations are prepared today to deal with this. Even politicians find it increasingly difficult to find the right answers. People like to have simple responses, that's why populism is gaining popularity and why politicians often use populist concepts. The question for society is: do we want this? And how can we take countermeasures? For this we need suitable tools that make it possible to renew and sustain confidence in politics and economy.
Why is it so important for politicians and decision-makers to gain expertise here and work with new tools?
This is about creating long-term trust. Politicians or other decision-makers will not gain this trust if their decisions are not evidence and fact-based. As a result, people's willingness to cooperate decreases and changes become more difficult to implement. Politics and business must meet this challenge and develop a toolbox for dealing with the increasing uncertainty. Behavioral economics can make a significant contribution to developing such tools.
How does this uncertainty affect human behavior concretely?
Uncertainty has a variety of effects. Behavioral economics suggests four central fields driver human behavior. There is the cognitive level, the conscious thinking and acting, which is subject to many, partly unconscious mistakes. The higher the uncertainty, the more difficult it becomes to make reasonable decisions. People then rely more on heuristics, i.e. rules of thumb, and their decisions become more error-prone.
The second driver is about social preferences such as equity or altruism and thus is also about cooperation. The great uncertainties with regard to future developments have serious implications for the perception of fairness, whether in the climate issue, migration concerns, or pension provision. If people feel treated unfairly, they stop cooperating and start punishing perceived perpetrators.
Further behavioral drivers are patience and willpower. People often make decisions that benefit them in the short term but do not assess the long-term consequences sufficiently. Spending money is always easier than saving it for the future. With greater uncertainty, the long-term consequences of decisions are more difficult to assess and the short-term rewards even more tempting.
Last,we are strongly oriented towards other people. The community - society as a whole or the group of people in which someone finds him or her self - influences behavior. We orient ourselves to social norms, to the unwritten laws of togetherness. This is also where the effects of technological change become noticeable. People behave fundamentally differently in digital rooms than in physical interactions. Reasons for this include apparent anonymity, the absence of a human counterpart and the lack of perceived social control. Experiments show, for example, that people are much more dishonest with an answering machine than when they are in direct contact with people.
What is the most important message that the participants of the upcoming Academy of Behavioral Economics will take with them?
Uncertainty and the resulting complexity is a challenge that can be mastered - with the right toolbox. Change is perceived positively when the focus is not on losing the status quo, but on what can be achieved with it. For example, for many companies, business experiments are not part of their culture, but can be used to test new business models in a simple and uncomplicated way. They are therefore an important tool to reduce uncertainty.
Ernst Fehr will speak at the Academy of Behavioral Economics, which will be held at the Gottlieb Duttweiler Institute on 29 January 2020.