Decision-making

Elsa Kugelberg on norms, choice, and responsibility (in Politics, Philosophy & Economics)

Ppe coverBy Mark D. White

Forthcoming in Politics, Philosophy & Economics is a fascinating article by Elsa Kugelberg (Oxford) titled "Responsibility for Reality: Social Norms and the Value of Constrained Choice," in which she investigates the impact of social norms on the responsibility we bear for our choices, using the example of the interaction of gender norms and HIV prevention measures. From the abstract:

How do social norms influence our choices? And does the presence of biased norms affect what we owe to each other? Looking at empirical research relating to PrEP rollout in HIV prevention policy, a case in which harmful gender norms have been found to impair the choices of young women, I argue that the extent to which we can be held responsible for our choices is connected to the social norms that apply to us. By refining T. M. Scanlon’s Value of Choice view, I introduce a norms-sensitive contractualist theory of substantive responsibility. This feminist ‘Value of Constrained Choice view’ presents those who choose under harmful norms as having generic reasons to reject principles that provide them with opportunities they are effectively constrained from choosing. I argue that to fulfil their duties to us, and our duties to each other, policymakers must study the influence of social norms on choice and accommodate it in public policy. Contractualists have reason to pay special attention to social norms, as their unequal effects on choice reveal that we are not living under terms that no one could reasonably reject.


Cost effectiveness is not the problem — government control of health care is.

Health dataMark D. White

In today's "The Upshot" in The New York Times, economist Aaron E. Carroll bemoans the fact that health policymakers, regulators, and spokespeople are reluctant, and sometimes even forbidden, to discuss and make use of information regarding the cost effectiveness of particular treatments. The fear is that they will invoke the spectres of rationing and "death panels," or more generally, medical decisions made on the basis of money alone and not the needs or interests of patients and their loved ones.

I agree with Carroll that cost effectiveness is an essential and necessary topic for discussion; after all, health care has to be paid for by someone, who is responsible for making sure that scarce resources are used in the most beneficial way possible. And I think most people understand this principle as well, even if they don't want to acknowledge it at times of tragedy and impending loss.

If people are afraid of calculations of cost effectiveness, it's because they don't want some distant, faceless, bureaucracy using cold data to make decisions that affect such an intensely personal aspect of their lives. But the problem isn't the numbers themselves—it's who is using them to make the critical decisions.

If health care decisions had not been centralized under the Affordable Care Act (or a similar plan), and health care decisions were left in the hands of doctors, patients, and insurance companies unbound by government mandates regarding coverage, these parties together could use cost effectiveness numbers in a way that worked with each patients based on his or her interests, coverage, and resources. Each patient, together with his or her doctor and loved ones, could balance these various factors in a way that furthered his or her overall interests within available resources and insurance coverage. They could use cost effectiveness information as one input into a specific decision in a way that furthers that patient's interests.

I wrote about this aspect of private health care in "Markets and Dignity: The Essential Link (With an Application to Health Care)," my chapter in my edited volume Accepting the Invisible Hand: Market-Based Approaches to Social-Economic Problems (Palgrave Macmillan), on pp. 13-14:

The possibility of making private decisions regarding the benefits and costs of various treatment options, whether for minor illness or chronic disease, puts the choice in the patient’s hands (as well as with her doctor and whomever else the patient wants to join the process, such as family or friends). In consultation with her doctor, the patient can assess the value of various treatments, considering the merits compared not only to their costs, and the benefits and costs of alternative options, but also other uses towards which those resources can be devoted, which are all subjective valuations. Perhaps she will choose not to undergo the premium treatment, even if she could afford it, because she wants to leave the money for her children, or take a cruise in the final months of her life; or perhaps she will sell her house to pay for a little more time on life support and with her grandchildren. In a market setting, this choice is hers, along with its benefits, costs, and other consequences.

I am not denying that the patient may not be able to afford the premium treatment because she does not have the resources for it; this is tragic, to be sure, but unavoidable in a world of scarcity. If she is not making these decisions, someone else is; an insurance company or HMO may also refuse her the premium treatment based on costs, and a government-run health plan may do the same. But in these cases, the decision would be made for her, according to someone else’s calculation of whether the treatment was “worthwhile” in terms of costs and benefits for the hospital, insurance company, or government health program, all of whom have scarce resources that must be allocated somehow. In a market context, the decision would be hers, even if it seemed she had no decision at all because she does not possess the resources, either due to bad luck or bad planning, or other choices made through her life.

All is not lost, necessarily; just because the premium treatment is out of reach does not mean there are not lesser, more inexpensive treatments that will also be of benefit. In a market system, this is the patient’s choice, just as she can choose what size house to buy, what model car to lease, what size TV to own. Every person prioritizes the various interests on her life; some forego the large house to take frequent vacations, some do the opposite. Some may opt for the cheaper treatment option to retain more resources for another goal in life, or to give more to others rather than spend it on premium care for herself. And certainly, past choices will constrain or expand her present options; one who spends her income on lavish toys throughout life should not expect sympathy when she cannot afford top-line treatment at the end of it. But these are her choices, while in any other system, this decision may be made for her, according to calculations based on the imputed value of her life and her well-being compared to other persons. Not every person can afford to have the premium treatment, but this fact is due to scarcity of resources, not the way in which they are allocated or distributed, and it will be true under a state-controlled system as well as a market system. A state system focused on efficiency cannot allow everyone to have the premium treatment either, and the choice of who (if anybody) undergoes it will be truly arbitrary, with no role for choice on the part of the patient or her family. Choices that so closely affect a person’s life should be made by that person alone (or other persons to whom she delegates—or sells—that authority); they should not be made by another party that either presumes to know her “true interests” or serves the collective weal in the name of efficiency.


Matthew Adler on extended preferences and interpersonal comparisons

Mark D. White

Matt Adler (Duke University) has a fascinating article in the latest issue of Economics and Philosophy (30/2, July 2014) titled "Extended Preferences and Interpersonal Comparisons: A New Account":

This paper builds upon, but substantially revises, John Harsanyi's concept of ‘extended preferences’. An individual ‘history’ is a possible life that some person (a subject) might lead. Harsanyi supposes that a given spectator, formulating her ethical preferences, can rank histories by empathetic projection: putting herself ‘in the shoes’ of various subjects. Harsanyi then suggests that interpersonal comparisons be derived from the utility function representing spectators’ (supposedly common) ranking of history lotteries. Unfortunately, Harsanyi's proposal has various flaws, including some that have hitherto escaped scholarly attention. In particular, it ignores the limits of personal identity. If the subject has welfare-relevant attributes that the spectator cannot acquire without changing who she is, full empathetic identification of the latter with the former becomes impossible. This paper proposes instead to use sympathy as the attitude on a spectator's part that allows us to make sense of her extended preferences. Sympathy – an attitude of care and concern – is a psychological state quite different from empathy. We should also allow for hetereogeneity in spectators’ extended preferences. Interpersonal comparisons emerge from a plurality of sympathetic spectators, not (as per Harsanyi) from a common empathetic ranking.


Call for abstracts: Conference, "Economics and Psychology in Historical Perspective"

Mark D. White

Conference call for contributions

Economics and psychology in historical perspective

(from 18th century to the present)

Paris, December 17th - December 19th 2014

Organized by Mikaël Cozic (UPEC, IUF & IHPST, France) and Jean-Sébastien Lenfant (U. Lille 1, France)

 

IMPORTANT DATES:

Notification of interest: June 10th 2014

Deadline for abstract:  July 10th 2014

Notification of acceptance: August 31th 2014

Full paper: December 1st 2014

 

SCIENTIFIC COMMITTEE:

Erik Angner (George Mason university, USA), Richard Arena (Université de Nice Sophia-Antipolis), Laurie Bréban (Université Paris 8, France), Luigino Bruni (Università Lumsa a Roma, Italy), Annie L. Cot (Université Paris 1, France), Agnès Festré (Université de Picardie Jules Verne, France), Till Grüne Yanoff (Royal Institute of Technology, KTH, Sweden), Alessandro Innocenti (Università di Siena, Italy), Ivan Moscati (Insubria University, Italy), Annika Wallin (Lunds Universitet, Sweden).

CONFIRMED INVITED SPEAKERS:

Philippe MONGIN (CNRS & HEC Paris, France), Floris HEUKELOM (U. Nijmegen, Netherdlands), Robert SUGDEN (University of East Anglia, United Kingdom).

CALL FOR CONTRIBUTIONS

“Psychology is evidently at the basis of political economy and, in general, of all the social sciences. A day will come when we will be able to deduce the laws of the social science from the principles of psychology” (Pareto, Manual of Political Economy, 1909, II, §1)

Neoclassical economics was built upon a theory of rational behavior that pretended to be independent from psychological foundations. Actually, Pareto, who has been instrumental in laying the foundations of modern utility and rational choice theory, uphold that economics and psychology needed to develop separately and that the hopes for reconciling psychology, economics and sociology in the social sciences “still remain some way off”.

Over thirty years or so, an important part of economics has been oriented towards realizing Pareto’s prophecy that a day would come when economics and psychology would benefit from reconciling each others, opening the way for a better understanding of individual and collective behaviors. This reconciliation comes after a period of time during which economics has developed its tools and principles away from psychology (or so the standard narrative argues), on the mere assumption that rational behavior could be described satisfactorily with a well-behaved utility function. For many economists, the offspring of this collective effort is called “behavioral economics”, and it is sometimes viewed a new paradigm in economics, providing tools and principles that may be applied to different fields of economic inquiry (finance, development economics, game theory, etc.).

Basics of behavioral economics are now part of any curricula in economics. The advent of behavioral economics has often been associated with a story-telling argument about its early development in the 1970s and its establishment, focusing on three main points: 1) the legitimization of experimental methods in economics; 2) the usefulness of concepts and ideas borrowed from psychology to increase the explanatory or predictive power of the theory of rational behavior; 3) the advent of a renewed view of human behavior and hence of new ideas in normative economics.

Actually, Pareto’s opening quotation reminds us also that psychology (in different guises) has been a fundamental issue for economists even since 18th century, if only because economists have usually grounded their own theory of economics on some ideas about human nature, and especially on human desires and beliefs.

In recent years, historians of economic thought and theoreticians have shown an interest in understanding the ins and outs of the behavioral turn in economics, and more broadly, on the introduction of psychological elements in economic explanations. Some have focused on recent history, enhancing the different trends of behavioral economics. Others have dealt with the nascent of behavioral economics and the early collaboration between economists and psychologists in the 1950s. Still some others have tried to understand how the marginalist school of thought had relied on the experimental psychology of its time—namely psychophysics—and how it had progressively been expelled out of the realm of economics, at least temporarily, with Pareto and Fisher. However, those contributions have not been coordinated and we are far from having a comprehensive overview of the complex history of the relationships between economics and psychology.

The aim of this conference is to gather contributions from historians of economics and historians of psychology (including cognitive sciences), and also from historically-oriented researchers and philosophers of these disciplines. The overall ambition is to understand the way economics has dealt with psychological arguments, methods and concepts throughout history and to highlight the main debates between economists and psychologists that have fostered and are still fostering behavioral economics. It is hoped that these will pave the way for an overall vision of the history of the relationships between economics and psychology and of the methodological transformations of economics as a discipline.

The organizers wish to limit the number of contributions so that most of the conference will take place in plenary sessions. Interested contributors are asked to indicate their interest in participating to the conference to A COMPLETER. The deadline for submitting an abstract is July 10th 2014. It is hoped that the contributions to the conference will in turn lead to the publication of a comprehensive reference book with short versions of papers and to thematic issues in journals.

Below is a non-exhaustive list of topics, authors and schools of thought:

  • Psychology in economics before the marginalist revolution (Hume, Smith, Condillac, Quesnay)
  • Psychophysics, psychology and the (pre)marginalists (Gossen, Jevons, Walras, Marshall, Edgeworth, Pareto and Fisher, psychology in the Austrian tradition)
  • Psychologists, economists, and the birth and development of experimental psychology (1850-1950)
  • Psychology in the institutionalist and Keynesian schools of thought (Veblen, Mitchell, J.M Clark, Keynes, Duesenberry, Post-Keynesian school).
  • How psychologists came to study decision and choice after World War II (Edwards, Davidson, Luce, Suppes, Siegel, etc).
  • The role and importance of ‘mathematical psychology’ and of the ‘representational theory of measurement’
  • Allais’s paradox and other decision paradoxes from the point of view of economics and psychology.
  • National traditions in the development of “economic psychology” (in relation with social psychology) and early behavioral economics in the USA (Katona, Simon), France, Germany, England, Italy, etc.
  • How psychologists have been involved in the development of behavioral economics and alternative paradigms to study economic behavior (e.g. Kahneman, Tversky, Slovic, Gigerenzer)?
  • Did economics borrow concepts and laws from psychology or did they rather borrow methods?
  • What has been the influence of behavioral sciences, marketing and business studies on the development of behavioral economics?
  • What have been the effects of behavioral economics on public policy? Which role played public policy in the development of behavioral economics?
  • What have been the after effects of behavioral economics on the representation of utility and welfare? (Pigou, Boulding, Scitovsky, Easterlin, Happiness economics)
  • How has behavioral economics come into different fields of economics (finance, development economics, health economics, social choice, public economics, normative economics)?
  • The historical development of neuroeconomics and its links with psychology.
  • The role of normative considerations in the development of behavioral economics, and the links between normative and behavioral economics.


If you are interested in participating in this conference, please send a notification of interest mentioning the theme of your contribution by June 10th 2014 and an abstract of approximately 1000 words prepared for blind review by July 10th 2014. Send your abstract by email at eco-psycho@rationalite.org  with the following information:

Name and surname

Affiliation

Title of your contribution

Abstract


Questioning Unconscious Influences on Decision-Making (in Behavioral and Brain Sciences)

Mark D. White

Forthcoming from Behavioral and Brain Sciences is the article "Unconscious influences on decision making: A critical review" by psychologists Ben R. Newell (University of New South Wales) and David R. Shanks (University College London):

To what extent do we know our own minds when making decisions? Variants of this question have preoccupied researchers in a wide range of domains, from mainstream experimental psychology (cognition, perception, social behavior) to cognitive neuroscience and behavioral economics. A pervasive view places a heavy explanatory burden on an intelligent cognitive unconscious, with many theories assigning causally effective roles to unconscious influences. This article presents a novel framework for evaluating these claims and reviews evidence from three major bodies of research in which unconscious factors have been studied: multiple-cue judgment, deliberation without attention, and decisions under uncertainty. Studies of priming (subliminal and primes-to-behavior) and the role of awareness in movement and perception (e.g., timing of willed actions, blindsight) are also given brief consideration. The review highlights that inadequate procedures for assessing awareness, failures to consider artifactual explanations of “landmark” results, and a tendency to uncritically accept conclusions that fit with our intuitions have all contributed to unconscious influences being ascribed inflated and erroneous explanatory power in theories of decision making. The review concludes by recommending that future research should focus on tasks in which participants' attention is diverted away from the experimenter's hypothesis, rather than the highly reflective tasks that are currently often employed.

As is the practice at BBS, the target article is followed by a number of short comments by invited scholars, in this case including Roy Baumeister and Ap Dijksterhuis (all in the same PDF file).

It's a shame Daniel Kanheman, Timothy D. Wilson, or Jonathan Haidt didn't contribute commentary, as they have all written in support of a strong role for the unconscious in decision-making. Nonetheless, this promises to be a interesting challenge to the current trend in behavioral science away from conscious rational processes in decision-making (a trend which is troubling to a philosopher/economist concerned with processes of ethical judgment!).


David Brooks on libertarian paternalism and "nudge"

Mark D. White

In today's New York Times, David Brooks comments on libertarian paternalism in "The Nudge Debate." There is not a lot in his article that is surprising or unreasonable, but it does suffer from some vagueness and misunderstandings. For instance, Mr. Brooks conflates interventions of a paternalistic nature (such as nudging people into retirement plans) and those of a nonpaternalistic nature (such as nudging people into registering for organ donation). While the mechanisms in both cases are similar—and raise the same issues of unconscious manipulation and subversion of rational decision-making processes—the purposes and motivations are very different, with only the former involving the policymakers substituting their interests for those of the decision-makers themselves.

Of more concern is Mr. Brooks' contention that libertarian paternalism does not involve value substitution. He writes,

Do we want government stepping in to protect us from our own mistakes? Many people argue no. This kind of soft paternalism will inevitably slide into a hard paternalism, with government elites manipulating us into doing the sorts of things they want us to do.

As I explain in The Manipulation of Choice, there is no way for the government to know what we value well enough to help us make decisions in our own interests. Because they lack this information, policymakers necessarily impose their idea of people's interests on them when they design nudges. Policymakers think that it's in our interests to save more; policymakers think that it's in our interests to drink less soda. These are not unreasonable assumptions, of course, but they are assumptions nonetheless, and it is pure hubris on the part of policymakers to presume that they bear any necessary relationship to people's actual interests.

Because Mr. Brooks apparently doesn't recognize this, he concedes the "theoretical" point but dismisses any real-world concerns:

I’d say the anti-paternalists win the debate in theory but the libertarian paternalists win it empirically. In theory, it is possible that gentle nudges will turn into intrusive diktats and the nanny state will drain individual responsibility.

But, in practice, it is hard to feel that my decision-making powers have been weakened because when I got my driver’s license enrolling in organ donation was the default option. It’s hard to feel that a cafeteria is insulting my liberty if it puts the healthy fruit in a prominent place and the unhealthy junk food in some faraway corner. It’s hard to feel manipulated if I sign up for a program in which I can make commitments today that automatically increase my charitable giving next year. 

This last paragraph is illuminating, because it conflates three different types of nudges. The first, organ donation, is a social issue; such a nudge is not paternalistic and therefore does not raise any issues of value substitution (though, as I said above, the mechanism still subverts rational processes). The third, self-commitment, is vague; there is nothing manipulative in the concept of commitment, but if such commitment is elicited using a nudge that bypasses a person's rational decision-making faculties, then it's a problem. Only the cafeteria example is by definition a paternalistic intervention; Mr. Brooks may not be insulted by the management of the cafeteria putting their idea of his interests above his own and manipulating his actions in those imposed interests, but that does not justify an action which would insult many others.

Finally, I do not see the issue of libertarian paternalism as one of theory versus empirics—in the case of paternalistic interventions, the theory iself discounts any attempts to measure its success. Mr. Brooks finishes the paragraph above with this sentence: "The concrete benefits of these programs, which are empirically verifiable, should trump abstract theoretical objections." In the case of paternalistic interventions, the "theoretical objections" render any "concrete benefits" questionable and inherently unverifiable. How do you measure the "concrete benefits" of an action meant to improve people's choices according to their own interests if you have no way to ascertain those interests? Such knowledge is necessary in order to "verify" any benefits from such a program. With socially-motivated nudges, like automatic enrollment in organ donation programs, this makes some sense, but with measures explicitly intended to "help" people better make decisions in their own interests, the idea of verifying "concrete benefits" makes no sense whatsoever, given the inherent subjectivity of those interests.

Rather than an issue of theory versus evidence, the nudge debate is a matter of autonomy. Each person's right to further his or her own interests, in a way consistent with all others doing the same, is violated by policymakers who impose their own conception of people's interests on them and then design policy tools that subvert people's rational decision-making processes to steer them towards those imposed interests. Given Mr. Brooks' antipathy towards individualism, I am not surprised that he disregards concerns about autonomy as an "abstract theoretical objection." To some, however, the right to pursue their own interests without the government questioning them is a very "concrete benefit" to living in a free society.

Then again, if policymakers really knew our true interests, they'd know that already, wouldn't they?


Have economists ignored clinical depression?

Mark D. White

ScienceA recent issue of Science (October 5, 2012) is a special issue on depression, and senior editor Peter Stern's introduction lays out the reason for it (emphasis mine):

Depression is a devastating disease. It affects not only the directly afflicted but also the people around them, their families, and their closest relations. It indiscriminately hits all strata of society, no matter one’s intellectual background, age group, or economic situation. There are many cases of highly successful and widely admired individuals who have been struggling with depression for years. Unfortunately, for reasons we still do not fully understand, this condition has been on the rise over the past decades. Considering its impact on an individual’s quality of life and subsequently on the economy and society in general, gaining an understanding of what causes depression and trying to develop effective therapies is of utmost importance. Hence, this year’s Neuroscience Special Issue is devoted to different aspects of depression.

I've long wondered why economists don't look more at both the microeconomic and macroeconomic effects of clinical depression. (I'm careful to add the modifier "clinical" because economists do, of course, spend a lot of time thinking about depressions, Great or otherwise.) Behavioral economists identify, quantify, and model the cognitive biases and dysfunctions that affect the choices of the average person, but have not yet (to my knowledge) looked into how depression affects decision-making. As Dr. Stern recognizes, choices affected by depression--given reported high rates of incidence of the disease--have potentially tremendous economic effects, not only on personal well-being but also on market outcomes, aggregate economic performance, and government policy.

BeckThere are many theories of depression in psychology, but one that seems extraordinarily well-suited to incorporating the effects of depression into economic models of choice is cognitive psychology, as typified by the work of Aaron Beck. Beck maintains “the individual’s problems are derived largely from certain distortions of reality based on erroneous premises and assumptions” (Cognitive Therapy and the Emotional Disorders, p. 3). Examples of this negative thinking include: dichotomous reasoning (everything is either black or white, failure or success), selective abstraction (focusing on failures and glossing over successes), and overgeneralization (exaggerating the importance and incidence of failures). In economic terms, these have obvious effects on beliefs and preferences, the foundation of decisions in the mainstream model of choice.

Depressives also report a lack of motivation or "paralysis of the will" that makes them less likely to act decisively to further their goals. In the mainstream economic model of choice, this can be be regarded once again as a result of distorted perceived benefits and costs (downplaying the former and emphasizing the latter) which result in a bias toward inaction (or at least decisional inertia).

This is just one possible framework, and there are many others. I believe that behavioral economists could work within such a framework to refine the cognitive and conative effects of depression on decision-making. Behavioral economists have already told us that we're "presumably irrational"--now it's time to turn to the members of society who are "presumably depressed."


Nutritional labeling, nudges, and a "cynical view of human nature"

Mark D. White

Food labelsNew today from associate editor Brian Fung at The Atlantic is a piece on an experimental nutritional labeling system modeled on traffic lights. In use in the United Kingdom (where it was instituted by the British government's "nudge unit"), the revised nutrition labels would have color-coded icons for fat, calories, and other aspects of food products according to whether the levels are considered healthy or unhealthy. Mr. Fung reports the results of a study from Masschusetts General Hospital that--unsurprisingly--such labels increase the amount of healthy food consumered and lower the amount of unhealthy food consumed.

I discuss labeling systems such as these in my upcoming book, The Manipulation of Choice: Ethics and Libertarian Paternalism, in which I differentiate between the information provided by such label--which allows people to make better decisions according to their own interests--and schemes like the traffic light one which nudge people toward some food and away from others based on bureaucrats' judgment of what is healthy and what is not. (I also discussed nutrition labeling in an earlier blog post.) As Mr. Fung acknowledges, "Bickering over what red, yellow, and green actually mean is likely to be as difficult -- if not more so -- than actually putting the system in place." Some of this bickering may be political, of course, but some will be due to disagreements among health experts over what a proper diet consists of--a debate unlikely to be settled any time soon among the experts, much less by government fiat!

But what I found most interesting about Mr. Fung's article was the irony in the subheading:

If soda bans take an implicitly cynical view of human nature, food labels that give consumers the impression of freedom might be their opposite.

I don't know what could reflect a more cynical view of human nature then trumpeting proudly the prospect of "giving consumers the impression of freedom." These two approaches to paternalistic regulation are not opposites--the only difference is that one is clumsy and the other is "clever." This attitude continues as the article begins (emphasis mine):

From New York City's point of view, humans are notoriously bad at making good decisions. That's what makes a ban on large sodas necessary: the idea that Americans can't be trusted with their own health. But maybe there's a middle ground between letting people gorge themselves on junk food and making it illegal. The key to making it all work is creating an environment where consumers still believe they're in control.

No, there's no cynical view of human nature on display there.

Finally, as the article ends, Mr. Fung writes:

New York's faith in humanity must be low indeed if it thinks only the most blatant coercion can get people behaving differently. Whether collectively or alone, people are hopelessly incompetent, is the message Bloomberg's soda ban sends. A more accurate way to put it might be that people are incredibly malleable, open to having their decisions swayed in terrible ways by factors that are out of their hands. The difference is slight, but in the small gap between those two statements lies an opportunity to move people in the right direction without taking away their freedom.

As above, I disagree with Mr. Fung: the difference is not slight, it is nonexistent. In my view, all paternalists have little faith in humanity, as shown by their willingness to substitute their own judgment for those of the people they claim to help, based on an overly simplistic view of decision-making and interests. And if you "move people in the right direction" by manipulation rather than by reasoned persuasion--subverting their deliberative processes rather than engaging them--you are taking away their freedom, little by little.

But as long as they're left with the "impression" of their freedom, as long as they "still believe they're in control," I guess that's OK.


Decision-making is not math: A lesson in the subjectivity of value

Mark D. White

Last month, The Economist published an article (based on research published in Journal of Marketing) on consumers' irrationality when compared discounts and added content:

Consumers often struggle to realise, for example, that a 50% increase in quantity is the same as a 33% discount in price. They overwhelmingly assume the former is better value. In an experiment, the researchers sold 73% more hand lotion when it was offered in a bonus pack than when it carried an equivalent discount (even after all other effects, such as a desire to stockpile, were controlled for).

In a recent issue, the magazine printed a letter by Rory Sutherland of Ogilvy & Mather UK, succinctly and humorously pointing out the problem with attributing irrationality to such consumers:

You mentioned research which revealed that shoppers often prefer “50% extra free” to a notionally more generous 30% reduction in price, and you cited this as evidence of irrationality or poor mathematical ability on the part of consumers. I think you may be wrong and consumers may be right.

There is, as the advertising sage Jeremy Bullmore observed, a significant difference between a bonus and a bribe. A price tells you much more about a product than merely what it costs. A price cut may be sensibly perceived as a mark of mild desperation on the part of the seller and it is not unreasonable to infer from a price cut that a product is an inferior good. Charging the full price but adding something extra does not convey the same desperation. In any case this whole debate is silly.

If people value 50% extra free more highly than 33% off, then that is an end of the matter. Since all value is subjective, what you are doing by offering the former is simply creating more perceived value at a lower cost. Whether or not the resulting behaviour conforms to some autistic neoclassical idea of rationality is irrelevant.

If the sole purpose of life was to be rational, we would have banned golf years ago.

Mr. Sutherland said it better than I ever could--and I've tried, in many places and many contexts, including previous posts (such as here), book chapters, and my forthcoming book, The Manipulation of Choice: Ethics and Libertarian Paternalism. Economists--of both mainstream and behavioral varieties--all too often see irrationalities where none exist because they insist on interpreting choice through the lens of their narrow understand of decision-makers and the overly simplistic choices they assume on consumers' parts.

The factors that consumers take into consideration when make choices are much more complicated than economists recognize--as Mr. Sutherland points out. And while behavioral economists are making headway in identifying some of these factors, they still don't account for qualitative ones like principles and ideals. Nor do they consider the complex and subjective interests of consumers (and all decision-makers), choosing instead to assume simple unitary goals like wealth-maximization. Until they take these common influences on choice into account, they will see irrationalities wherever they look--which reflects more on the shortcoming of their models than on the decision-makers themselves.