Wednesday, January 30, 2008

What Is Up With Economists?

Like I mentioned before, I sometimes read the Freakonomics blog. As I also mentioned before, sometimes the arguments economists make about things, and the way they approach their theories and their lives, leaves me feeling seriously mystified.

Leading me to wonder, is thinking rationally bad for you?

Over at Freakonomics, Stephen Levitt tells the true story of an unnamed economist with a young daughter. Here's the story.

Father promises to take daughter to Hannah Montana concert. They have no tickets. They go to the venue. Increasing panic and anxiety as father realizes prices for scalped tickets are astronomical and time is running out. At the last minute, father scores cheap second-row seats, hooray!

Then a twist. Father thinks: I could sell these, make a huge profit, buy regular seats, and still see the show! Uh-oh! What will he do?

Thank god someone there was behaving like a normal person. Daughter starts crying. Father shifts course: OK, we'll use the tickets! They do, the show is awesome, daughter totally gets to talk to some back-up singer or something and is thrilled. Happy ending.

I suppose the idea behind selling is that using the tickets is like giving away the 1000 dollars you could get for them; you wouldn't pay 1000 dollars even for second-row tickets to start, so why would you now?

Man, if someone tried to pull that reasoning on me I'd start crying, too. Let's face it: giving up the opportunity to maybe make 1000 dollars when time is short and you might miss the concert is in no way comparable to paying 1000 dollars for tickets. It just isn't.

Then, too, how thrilling and fun to suddenly be in the second row. How awesome! It seems so cold not to treat it that way. Many of life's most excellent experiences are like that; how could a person fail to appreciate that so dramatically?

You could say, in this case it's better to act non-rationally. But you don't have to. As some Freakonomics commenters point out, by factoring in the awesomeness, you can defend the choice to use the tickets on purely rational grounds: it was, in this case, worth the money. Cost-benefit-wise.

On this interpretation, what went wrong with the father's reasoning wasn't that he over applied rational thinking, but rather that he underestimated the disappointment of selling and underestimated the pleasure and fun of being in the second-row.

So then we ask, well, why did he misestimate? Clearly he misestimated because when you start doing cost-benefit analysis, you develop a clear bias toward easily estimated goods. Like money. And the fact that failing to make 1000 dollars should be the same as losing 1000 dollars, because it's clear, looms sort of large.

In this sense, it seems to me that engaging in rational-decision-making can make you less rational. You just start guessing wrong.

I think this might help explain why economists also underestimate the vague goods associated with community and friends and so on and overestimate the good associated with money and material comforts (as I said was going on here). Material goods are just easier to add up.

When I went back to Freakonomics to get the link for this story, I saw a new post in which Levitt also said that he "started" but "didn't manage to finish" three of the five books related to high SAT scores (don't ask): 100 Years of Solitude, Crime and Punishment, and Atlas Shrugged.

I usually poo-poo alarmists about reading, but really? You couldn't finish 100 Years of Solitude? Crime and Punishment? I mean, I can see not liking them. And putting them down. And I can see never having picked them up. But it really sounds like the problem for Levitt was that they were too long. Hm! Surprising!


Anonymous said...

Yes. I knew the world was going to hell in a handbasket in just the way N. M. describes when the whale swam into SF Bay, and all the newspapers could think to do was calculate How Much Money Was Being Wasted by all those city and county and state-owned boats burning all that oil and generally getting worn out by caring for a stupid aquarian mammal who couldn't probably swim her way out of a paper bag.
So the real villain is the pocket calculator and its epigonoi, that allow small-minded and greedy people to calculate things having to do with money down to the last basis point (did basis points even exist before this nonsense began?), meanwhile neglecting precisely the glories of having unexpectedly and cheaply gotten a second-row seat.

Noko Marie said...

Hi anonymous, glad you think so too. I'm so behind I didn't know what a basis point is and had to google it. The definition is less interesting than the fact that I found it on "investopedia." I love Wikipedia but will this proliferation of -pedias and wiki-s never cease?