Read Online Misbehaving: The Making of Behavioral Economics by Richard H. Thaler - Free Book Online
Authors: Richard H. Thaler
Ads: Link
hypothesis even though Lichtenstein and Slovic (1973) had replicated their studies for real money on the floor of a casino in Las Vegas. Their dismissal of this evidence might be explained by another of their hypotheses. They also explicitly entertained the possibility that the perverse results were obtained simply because the experimenters were psychologists, who were known to deceive people in experiments. Needless to say, this hypothesis did not sit well with any psychologists who stumbled onto their paper.
7
Bargains and Rip-Offs
My friend Maya Bar-Hillel was shopping for a quilt to use as a comforter on her double bed. She went to the store and found one she liked that was on sale. The regular prices were $300 for a king size, $250 for a queen size, and $200 for a double. This week only, all sizes were priced at $150. Maya could not resist: she bought the king size.
T o begin any discussion of mental accounting, it helps to understand the basic economic theory of the consumer. Recall from the discussion of the endowment effect that all economic decisions are made through the lens of opportunity costs. The cost of dinner and a movie tonight is not fully captured by the financial outlay—it also depends on the alternative uses of that time and money.
If you understand opportunity costs and you have a ticket to a game that you could sell for $1,000, it does not matter how much you paid for the ticket. The cost of going to the game is what you could do with that $1,000. You should only go to the game if that is the best possible way you could use that money. Is it better than one hundred movies at $10 each? Better than an upgrade to your shabby wardrobe? Better than saving the money for a rainy day or a sunny weekend? This analysis is not limited to decisions that involve money. If you spend an afternoon reading a novel, then the opportunity cost is whatever else you might have done with that time.
Thinking like that is a right and proper normative theory of consumer choice. It’s what Econs do, and in principle we should all strive to think this way most of the time. Still, anyone who tried to make every decision in this manner would be paralyzed. How can I possibly know which of the nearly infinite ways to use $1,000 will make me happiest? The problem is too complex for anyone to solve, and it is unrealistic to think that the typical consumer engages in this type of thinking. Few people think in a way that even approximates this type of analysis. For the $1,000 ticket problem, many people will consider only a few alternatives. I could watch the game on television and use the money to go visit my daughter in Providence. Would that be better? But figuring out the best alternative use of the money is not something I or anyone is capable of thinking about—not even close. *
What do people do instead? I was unsure about how to study this and other aspects of consumer decision-making, so I hired a student to interview local families to see what we could learn about what real people do. I concentrated on lower-middle-class households because spending decisions are much more important when your budget is tight.
The interviews were designed to give the participants plenty of time to talk about whatever they wanted. (We paid them a fixed amount to participate but some talked for hours.) The target respondent was the person in the household who handled the money. In married couples, more often than not this responsibility fell to the wife. The purpose of the interviews was not to collect data for an academic paper. I simply hoped to get an overall impression of how people thought about managing their household’s finances. Adam Smith famously visited a pin factory to see how manufacturing worked. This was my pin factory. The interviews grounded me in reality and greatly influenced everything I later wrote about mental accounting.
The first question to deal with was one I had been pondering since the days of the List.
7
Bargains and Rip-Offs
My friend Maya Bar-Hillel was shopping for a quilt to use as a comforter on her double bed. She went to the store and found one she liked that was on sale. The regular prices were $300 for a king size, $250 for a queen size, and $200 for a double. This week only, all sizes were priced at $150. Maya could not resist: she bought the king size.
T o begin any discussion of mental accounting, it helps to understand the basic economic theory of the consumer. Recall from the discussion of the endowment effect that all economic decisions are made through the lens of opportunity costs. The cost of dinner and a movie tonight is not fully captured by the financial outlay—it also depends on the alternative uses of that time and money.
If you understand opportunity costs and you have a ticket to a game that you could sell for $1,000, it does not matter how much you paid for the ticket. The cost of going to the game is what you could do with that $1,000. You should only go to the game if that is the best possible way you could use that money. Is it better than one hundred movies at $10 each? Better than an upgrade to your shabby wardrobe? Better than saving the money for a rainy day or a sunny weekend? This analysis is not limited to decisions that involve money. If you spend an afternoon reading a novel, then the opportunity cost is whatever else you might have done with that time.
Thinking like that is a right and proper normative theory of consumer choice. It’s what Econs do, and in principle we should all strive to think this way most of the time. Still, anyone who tried to make every decision in this manner would be paralyzed. How can I possibly know which of the nearly infinite ways to use $1,000 will make me happiest? The problem is too complex for anyone to solve, and it is unrealistic to think that the typical consumer engages in this type of thinking. Few people think in a way that even approximates this type of analysis. For the $1,000 ticket problem, many people will consider only a few alternatives. I could watch the game on television and use the money to go visit my daughter in Providence. Would that be better? But figuring out the best alternative use of the money is not something I or anyone is capable of thinking about—not even close. *
What do people do instead? I was unsure about how to study this and other aspects of consumer decision-making, so I hired a student to interview local families to see what we could learn about what real people do. I concentrated on lower-middle-class households because spending decisions are much more important when your budget is tight.
The interviews were designed to give the participants plenty of time to talk about whatever they wanted. (We paid them a fixed amount to participate but some talked for hours.) The target respondent was the person in the household who handled the money. In married couples, more often than not this responsibility fell to the wife. The purpose of the interviews was not to collect data for an academic paper. I simply hoped to get an overall impression of how people thought about managing their household’s finances. Adam Smith famously visited a pin factory to see how manufacturing worked. This was my pin factory. The interviews grounded me in reality and greatly influenced everything I later wrote about mental accounting.
The first question to deal with was one I had been pondering since the days of the List.
Similar Books
