Behavioral Economics

Tag: Behavioral Economics

“Get Her Something Expensive and Useless”

It’s that time of year where we bid you Happy Holidays from the Economics profession.

Up first, we have a truly heroic figure, Joel Waldfogel, author of Scroogeonomics.*  I don’t know your preferences as well as you do, so whatever I give you is probably sub-optimal, unless you tell me exactly what you want.  And even then, wouldn’t you rather just have the cash anyway?  For those of you intermediate micro students, you know that kids prefer cash over any in-kind equivalent.

Kudos to Professor Waldfogel for willing to be “that guy.”

Speaking of Scrooge, was he really such a bad guy?  Not so, says Steven Landsburg. Let’s give it up for our annual Scrooge endorsement from this classic Slate piece:

In this whole world, there is nobody more generous than the miser–the man who could deplete the world’s resources but chooses not to. The only difference between miserliness and philanthropy is that the philanthropist serves a favored few while the miser spreads his largess far and wide.

If you build a house and refuse to buy a house, the rest of the world is one house richer. If you earn a dollar and refuse to spend a dollar, the rest of the world is one dollar richer–because you produced a dollar’s worth of goods and didn’t consume them.

Ah, I just feel all warm and fuzzy inside.

Moving on to The Atlantic, where we have “The Behavioral Economist’s Guide to Buying Presents.” Now this is some truly indispensable advice.  Like Waldfogel above, the money point is to just give money. But, for the true romantics who feel compelled to give a gift, the behavioralists recommend this:

Buying for a guy? Get him a gadget. Buying for a girl? Get her something expensive and useless.

The gadget I get.**  The expensive and useless? That’s from Geoffrey Miller’s, The Mating Mind.  Here’s a brief explanation of courtship:

The wastefulness of courtship is what makes it romantic. The wasteful dancing, the wasteful gift-giving, the wasteful conversation, the wasteful laughter, the wasteful foreplay, the wasteful adventures.  From the viewpoint of “survival of the fittest” the waste looks mad and pointless and maladaptive… However, from the viewpoint of fitness indicator theory, this waste is the most efficient and reliable way to discover someone’s fitness. Where you see conspicuous waste in nature, sexual choice has often been at work.

This presents something of a conundrum because “expensive and useless” seems to be at odds with Waldfogel’s hyper-utilitarian cold, hard cash suggestion.

So if you want to hedge your bets, give her Euro!

…

* The book is a follow up to the classic, “The Deadweight Loss of Christmas.”  Clearly, the book title Scroogonomics can be chalked up to the value-added of the publishing house.

**Conceptually, that is. I generally get ties and socks.

Interdependent Utility Functions

Does knowing what your peers make matter to how happy you are?  Certainly, the utility functions that I sketch in Econ 300 say no.  As Ray Fisman puts it in a recent piece at Slate, “Why do we care what those around us make? It doesn’t affect the real estate or furniture or sushi dinners we can afford.”

On the other hand, of course it matters. And Fisman continues:

[I]n recent years, economics has become both more social and behavioral, borrowing evidence and ideas from elsewhere in the social sciences. Economists now acknowledge that we constantly judge our own accomplishments in comparison to others, and salaries serve as one ready benchmark. People (and perhaps monkeys, too) are also averse to inequality—unequal pay for equal work just isn’t fair (especially if you’re the one who drew the short straw).

Monkeys? Wow.

Fisman talks about an ingenious study by group of economists, including David Card and MacArthur genius grant winner Emmanuel Saez, that investigated how differences in pay affect variables like job satisfaction.  If you are interested in how economists think about these things and how they evaluate them empirically, this paper is worth checking out.  The abstract is below the fold: Continue reading Interdependent Utility Functions

Let’s Mis-Behave

Economists are often chided for their “unrealistic” behavioral assumptions, specifically rational self-interest.  An obvious direction for research was to relax some of these assumptions, often with surprising results.  Indeed, the Nobel Prize in economics has gone to scholars such as Herb Simon and Daniel Kahneman for work that took a hard look at the rational man assumption.  But I would probably point to the blockbuster, almost freakish success of Freakonomics and Super-Freakonmomics, texts that sometimes venture into this realm, that put behavioral economics in the public eye.

George Lowenstein
George Lowenstein

Despite the success of behavioral economics and finance, we have to be careful how far we want to push it. “[I]t’s becoming clear that behavioral economics is being asked to solve problems it wasn’t meant to address,” says Carnegie Mellon’s George Lowenstein, one of the giants in the field. Writing a cautionary op-ed in today’s  New York Times, Lowenstein and his co-author give a number of examples where reliance on behavioral results can miss the forest through the trees.

A “gallons-per-mile” bill recently passed by the New York State Senate is intended to help drivers think more clearly about the fuel consumption of the vehicles they purchase; research has shown that gallons-per-mile is a more effective means of getting drivers to appreciate the realities of fuel consumption than the traditional miles-per-gallon.

But more and better information fails to get at the core of the problem: people drive large, energy-inefficient cars because gas is still relatively cheap. An increase in the gas tax that made the price of gas reflect its true costs would be a far more effective — though much more politically painful — way to reduce fuel consumption.

I think the LU economists are with Lowenstein on this one.  We believe that you need to be grounded with a clear understanding of the fundamentals in order to understand the strengths and weaknesses of the discipline.