Thus far this week (see here and here), we have seen why Adam Smith can be considered to be the founder of behavioral economics. What Smith calls this “absurd presumption in [our] own good fortune” (i.e. optimism bias), combined with the pull of our emotions, clouds our ability to measure probabilities and make mathematically rational decisions.

In summary, Smith explains in Book I, Chapter 10 of The Wealth of Nations how optimism bias and the emotional appeal of large prizes can lead us to overestimate the probability of winning in certain situations, such as state-run lotteries. (Para. 27) But at the same time, he also shows how these cognitive quirks can lead us to underestimate the probability of more distant or remote risks of misfortune. (Para. 28)

Next, in Paragraphs 29 and 32 of Chapter 10 of Book I of his magnum opus, Smith further observes that young people are especially risk-seeking:

“The contempt of risk and the presumptuous hope of success are in no period of life more active than at the age at which young people choose their professions. How little the fear of misfortune is then capable of balancing the hope of good luck appears still more evidently in the readiness of the common People to enlist as soldiers, or to go to sea, than in the eagerness of those of better fashion to enter into what are called the liberal professions.” (WN, I.x.29; my emphasis)

“The dangers and hairbreadth escapes of a life of adventures, instead of disheartening young people, seem frequently to recommend a trade to them.” (WN, I.x.32)

What is so utterly amazing about these particular passages is just how prescient they are. Although young people today (Gen-Z, anyone?) are supposedly engaging in such risky behaviors as drinking, smoking, and pre-marital sex at lower rates than previous generations (see here, for example), young people still engage in more risky behavior than older adults overall! (A summary of the work of contemporary researcher of adolescent risk-taking, Laurence Steinberg, calls teens “risk junkies“! See also the TED Talk below.)

Also, as an intriguing aside, notice how Adam Smith compares and contrasts “readiness of the common People to enlist as soldiers” with “the eagerness of those of better fashion to into … the liberal professions.” (I.x.29) What Smith appears to be saying here is that a young man from a poor and middle-class background — e.g. “[t]he son of a creditable labourer or artificer” (I.x.31) — is even more likely to make bad or risky decisions than the scion of a powerful or wealthy family. Or more simply put, the operation of optimism bias not only has a temporal dimension; it also has a social class dimension for Smith!

In the next two passages (Paragraphs 30 & 31 of Book I, Chapter 10), Smith compares and contrasts the profession of a common soldier (Para. 30) with that of a sailor (Para. 31). We will turn to those two passages in my next post. (To be continued…)