Wednesday, August 24, 2011

Behavioral Economics Reflections

Chapter 13 of Daly & Farley’s Ecological Economics is titled “Human behavior and economics” and is much the intersection of happiness psychology and microeconomics used to discredit the assumptions of neoclassical economics. I love behavioral economics, and I have been surprised by how little the shaky foundational assumptions of economics are questioned, less still their consequences. So I enjoyed this chapter greatly and thought I would pull a few seemingly important points out of it.

Homo economicus is a dick.

He is utterly selfish, coldly rational, and totally insatiable. I have known a few people that approach this archetype, and I have made an effort to know them less.

You should probably move to Costa Rica.

The authors plot, by country, life satisfaction against per capita income. For countries with median incomes of less than $20,000, more income correlates with greater satisfaction. However, above $20,000 per year, life satisfaction flat-lines. People in Norway (~$55,000/year) are no happier than people in Ireland (~$35,000/year). A few countries stand out as obvious outliers. The one that really caught my eye is Costa Rica, where people have the greatest average life satisfaction of any country surveyed (~8.5/10) while earning a meager $10,000/year.

My parents bought the wrong house. Maybe.

While making more money and getting more and better stuff doesn’t make us happier, being richer than those we compare ourselves to does. So my parents, abiding by the maxim to buy the smallest house in the nicest neighborhood you can afford, put us in a situation where we’d often be comparing ourselves to neighbors with more money than ourselves. For whatever discontentment that may have spurred, it also got my sister and I into one of the best public school systems in the country, and it put us in common contact with doctors and lawyers and professors, normalizing the experience of success and enculturating us to a higher-class existence than we would have otherwise known. If my digression here makes any point, it is just that measuring the benefit of any decision or behavior is complex and complicated. And that you should probably take your big American savings and move to Costa Rica.

We are intrinsically irrational.

Much has been made of this recently (see, e.g., Dan Airely's Predictably Irrational), but it is so undermining of the assumptions of neoclassical economics that it deserves to be stressed. E.g., suppose that an infectious disease is threatening to kill a town of 600 people. You can choose between quarantining the town, which will have a 1/3 chance of saving everyone in the town and a 2/3 chance of saving none, or administering a vaccine, which will save 200 of the 600 people. Which would you choose? Now, suppose that you have to choose between a course of action that will kill 400 people and a course of action that will have a 2/3 chance of killing 600 people and 1/3 chance of killing no one. Which would you choose? In the second scenario, when you're doing the killing, most people (78%) would take the gamble. In contrast, in the first scenario, when you're doing the saving, most people (72%) would take the certain saving of 200 lives. So, when saving, most people take the sure thing; when killing, most people roll the dice. But the scenarios are identical in their effects! The choices are the same: both have you choose between 400 people certainly dying and a 2/3 chance of 600 people dying, but because they are "framed" differently, no more than a quarter of us make a consistent choice.

You should volunteer more often. And then go dancing.

While making more money (above the $20k threshold discussed earlier) won’t make you happier, volunteering will. Devoting resources to others produces a lasting sense of contentment, and people who volunteer are happier, healthier, and more confident than those who do not. I read somewhere else that there is only one thing that makes people happier than volunteering… dancing.

Community and communication beget cooperation.

Suppose you and three others are each given $100. Each of you will choose individually how much of your $100 to contribute to a pool, which will then be doubled and split evenly among the four of you. In the end you'll go home with what you didn't contribute to the pool plus your 1/4 of the doubled pool. How much do you contribute? Homo economicus, of course, would contribute nothing. He’d keep his $100, and take his share of whatever the three suckers with him contributed. What a dick! Back in the real world, among university students, the average contribution to the pool is about half, with a bunch giving nothing and some giving all. So, given that the individually-rational behavior is to give nothing, while the wealth-maximizing behavior is to give everything, how can you get people to contribute more? Let them talk to each other before they make their decision. They contribute more to the doubled pool that way, even if they know that in the end, they won’t be told how much each person contributed.

My first thought upon learning this was the importance of community control of resources, among communities small enough that everyone knows each other. If you share a fishery with a couple dozen people with whom you talk regularly, you are very unlikely to deplete that fishery. If you share a fishery with a couple million people (or, heaven forbid, a few corporations), or even a couple dozen people you don’t know or talk to, there’s very little to restrain people from acting in the individually-rational, but collectively-disastrous, manner of harvesting fish as fast as possible until the fishery dries up.

Motivating behavior with money can be counter-productive

Parents who refuse to pay their children for grades have long known this to be true, and now we have science to back it up. A day care center in Israel had a problem of parents being late to pick up their children. To get the parents to be more prompt, the day care began charging parents who showed up late. Turns out, that only made the problem worse. It seems that before they were being charged for being late, the parents (most of them, anyway) felt morally obliged to pick up their children on time. When they daycare put a fee on being late, the moral obligation was lifted as it was replaced by a market transaction. Here's an even more striking example of how money messes with our moral-social behavior: When subjects are primed to think about money—e.g., by having a computer in the corner of a room with a screensaver displaying money—they are less likely to help others, less likely to ask for help themselves, less social, and when they sit down at a table with others, they place their seats further from others than those who weren’t “money-primed.”

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