Recently I cited a Gary Becker paper showing that many microeconomic theories remain valid even if individual actors exhibit irrational behavior. Tremble at the power of relative prices! Dan Ariely has a different perspective. He writes in “Predictably Irrational”:
“[...] imagine that two new taxes will be introduced tomorrow. One will cut the price of wine by 50 percent, and the other will increase the price of milk by 100 percent. [traditional economic consequences blah blah] What if the new taxes are accompanied by induced amnesia for the previous prices of wine and milk? [...] I suspect that the price changes would make a huge impact on demand if people remembered the previous prices and noticed the price increases; but I also suspect that without a memory for past prices, these price changes would have a trivial effect, if any, on demand. If people had no memory of past prices, the consumption of milk and wine would remain essentially the same, as if the prices had not changed.”
In his paper, Becker gives two extremes of irrational actors. There is the extremely impulsive, who acts randomly, and the extremely inertial, who makes the same choices as before the same regardless of exogenous changes. It seems to me that the first type is much like Ariely’s amnesiac. I shouldn’t overstate Ariely’s position though, on the next page after discussing a gas tax he acknowledges “I am not suggesting that doubling the price of gasoline would have no effect on consumers’ demand. But I do believe that in the long term, it would have a much smaller influence on demand than would be assumed from just observing the short-term market reactions to price increases.” That sounds much more plausible, though also vague enough to be a pretty weak statement. I suppose quantifying such things is more appropriate for journal articles. This is interesting, because well-known behavioral economist George Loewenstein (and fellow-traveler Peter Ubel) have recently argued that policy-makers should focus more on the blunt-force of changing relative prices in order to make significant changes in consumer behavior. It should be acknowledged though that personal vehicles consume a rather small proportion of fossil fuels, so presumably more bottom-line oriented organizations (e.g. coal plants) be the targets.
The next part I found interesting is unrelated.
Ariely discusses an experiment in which people were paid either $5, $0.50 or nothing to repeatedly move a circle onto a square on a computer. He says that the different performance of the first two is just what traditional economics would expect, but the higher performance of the pure volunteers is a surprise. It occurred to me that homo economicus would consider the paid participants chumps. Their pay wasn’t actually based on their performance at all, so they didn’t actually have to do anything. He gives a number of examples of how people are more willing to do something for free than a small amount, of course noting that we have social vs market frames in which different things are acceptable. I recalled Robert Ellickson citing Edward Banfield on the apprehension at which some Italian peasants had regarding the receipt of favors (interesting in that Ariely had just previously discussed the pathological appeal of “FREE!” market goods*). It meant you were in their debt. The introduction of a cash transfer (resisted by the ranchers Ellickson studied) makes it clear that no such debt is owed or is being payed off, what’s paid is really what the exchange is worth. I wouldn’t say it is purely a matter of not wanting to take on debt though (except perhaps when it comes to career criminals, as occasionally documented in Venkatesh’s “Off the Books”). Ellickson emphasizes that certain functional norms rely on a tight-knit community, and modern formalized markets are optimized to work with a large number of strangers engaging in one-off anonymous interactions. The introduction of market mechanisms threatens to transform a non-market web of relationships into another form, and signals that one does not intend to be a normal participant in that system of mutual debts & assistance.
*It struck me regarding those particular experiments that it involved behavioral psychologists deliberately offering the choice of greater consumer surplus. In standard consumer interactions, people may tend to assume that the seller is not cutting-me-own-throat (even if named Dibbler) and so a one-cent candy gets what you paid for it. A free good normally entails no cost (unlike in Ariely’s experiment in which one has two mutually exclusive options to choose from), so one may automatically pick it up without a second-thought. I think Ariely’s point about fear and how not having to think about cost obviates it is quite correct.
UPDATE: I haven’t really read further into it, but I noticed that Ariely discussed the Israeli daycare study that Steve Levitt also described in “Freakonomics”. Ariel Rubinstein has criticized that study, but his “I’m an Israeli and know the daycares don’t keep track of that stuff” would seem to have less weight against Ariely. But on the other hand, maybe Ariely didn’t have kids until he was in America and hasn’t experienced being late to pick any up from there.
UPDATE 2: Thorfinn finds a suspiciously high portion of Ariely’s results to be interesting. I should note that a number of times throughout the book he reports null results. For example, putting unusual condiments (“cloves, nutmeg, orange peel, anise, sweet paprika, and cardamom”) next to normal coffee ingredients in fancy rather than crude containers did not people any more likely to use them. It did however cause people to say their normal coffee tasted better. In another experiment he hoped to measure the amount of vinegar people added to their beer if they were told their sample contained two drops before vs after drinking, but nobody who added any deviated from the provided recipe of two drops. In an unrelated experiment he found that students given the opportunity to cheat on a quiz (with more correct answers receiving more money) will do so, but it doesn’t matter whether they could dispose of the evidence of their cheating or even just grab the amount of money they deserved out of jar (possibly even exceeding the maximum for the quiz) without reporting their score. However, he describes that second result (the irrelevance of the risk of getting caught) as “counterintuitive”, so it may just be more evidence for Thorfinn’s “interesting result” critique.