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Behavioral economists really ought to be thanked for making price theory more interesting. They do so by pointing out the many cases where people do not seem to behave in a way that homo-economicus would suggest they should behave. That’s great – because it focuses our minds on what exactly the rational choice paradigm can and cannot achieve.

But there are instances when the desire to point out the counterintuitive actually takes away from our basic economic intuition. For example, there are pschological studies that seek to ask when people appear to be patient and impatient. It’s not that impatience or patience itself is irrational, it is rather that people often say that they want to be patient yet act impatiently (e.g. eating that cupcake late at night) — you can think up your own examples.

There was a famous experiment run where folks told guys to imagine that they had just won a kiss from their most favorite actress. And then the guys were asked whether they would like to receive the kiss now or some time in the future. If I remember correctly the results of the study showed that most folks wanted to wait to receive the kiss next year. In other words, most folks seemed to be acting patiently. I have no problem with this as it stands.

However, the reason this is interesting is that when we lay this behavior side by side with our tendency to have low measured savings rates (I think savings are richer than that – after all, what is going to college if not a form of savings of human capital) and of our impulsive selves when faced with yummy desserts, it would seem to be a contradiction.

But I find no such contradiction if we think of the situation the way a price theorist does. When I see a scenario here, I ask myself, “what exactly is the good in question.” And while it is clear that a kiss from Ashley Judd is the good, I offer up the possibility that the good is different for different people – and this is because we care about the services derived from any particular good not the nature of the good itself. In the case of the future kiss, by knowing that you have it, you get to savor the thought of the experience. And if this is the case, then by delaying the kiss, at the same time we are impulsively and impatiently consuming the good, “pleasurable thoughts” right now, and we get to enjoy them regularly until the kiss has come and gone. Is our chooser therefore patient or impatient? You cannot say, but I would offer up that we tend to be impatient in our choices to consume any good – after all, that is the point of making a choice. So I do not see a large class of behavior as being anomalous to the general way price theorists look at the world.

Similarly, economists in the price theory mold typically advise that it is “rational” to hold off on paying a cost until as long as possible (sort of the way Congress deals with entitlement reform). But in other experiments, when choosers are told that they must experience an electric shock and can choose to get it now or later, they often choose to get it out of the way and do it now.

Is this irrational? I’d suggest not, again for the reason that the good in question just isn’t the electronics pulsing through your skin, but rather the terror you feel when thinking about future pain.

Does this mean that behavioral anomalies do not exist? Not at all. After all, I think I get negative pleasure by writing this blog, yet I remain committed to doing it. But I do offer up the hope that you raise your standard of proof when considering “obvious” rejections of the standard choice paradigm, just as you do elsewhere in your lives.

3 Responses to “Behavioralism: Too Cute by Half”

  1. Trapper_John says:

    Interesting as always. I worked in Decision Analysis for a period of time, where we would distinguish between normative and descriptive decision-making (what SHOULD a firm do vs. what DOES a firm do). Assigning a word like “should” is relatively easy for a company because firms, for the most part, espouse their values in terms of returns for shareholders. In that light, rational/irrational can be objectively defined, albeit with some debate over long-term vs. short-term.

    For individuals, this is not the case. Understanding what a person finds important in any particular instance (which is typically more than just one thing) is incredibly difficult. One of my mentor’s favorite sayings was, “Assessing values is hard; the rest is just math.” Any outside assessment that ascribes rational or irrational to a person’s actions inherently imposes a value framework onto that individual.

    Progressives and Conservatives alike are guilty of this. Progressives tend to couch this in terms of you not doing what they “know” is best for you (not eating fast food, buying health insurance). Conservatives don’t care what your values are, they just don’t want you to do certain things that don’t jive with their values (be gay, do drugs, have an abortion).

  2. Rod says:

    Financial planners tend to encourage people to defer income instead of taking the tax hit now, presumably because in the future, when you are retired, your marginal tax rate will be lower than it is in your salad days. Us conservatives tend to take that advice with a grain of salt. Is government going to be smaller or larger in the not-too-distant future, and will there be fewer or more demands on taxpayers to foot the bill?

    Of course, if large deficits are here to stay, maybe it makes sense to borrow as much as you can at three percent and pay it back with inflated dollars?

    Which reminds me — maybe I’ll buy a few more cartons of Marlboros and keep them around as a more portable medium of exchange than a wheelbarrow full of Federal Reserve Notes.

  3. Harry says:

    Trapper, let’s not be loose in charging others with motives, thereby begging the question.

    Wintercow referred to saving rates. It does not surprise me a bit today that people with cash are indifferent to buying a Jumbo CD at the bank, yielding less than one percent. I think a lot of people are waiting for the crowd to run for the door.

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