benefit both of us. This means that the mutual benefit of trading rests on the assumption that all the players in the market know the value of what they have and the value of the things they are considering getting from the trade.
But if our choices are often affected by random initial anchors, as we observed in our experiments, the choices and trades we make are not necessarily going to be an accurate reflection of the real pleasure or utility we derive from those products. In other words, in many cases we make decisions in the marketplace that may not reflect how much pleasure we can get from different items. Now, if we canât accurately compute these pleasure values, but frequently follow arbitrary anchors instead, then it is not clear that the opportunity to trade is necessarily going to make us better off. For example, because of some unfortunate initial anchors we might mistakenly trade something that truly gives us a lot of pleasure (but regrettably had a low initial anchor) for something that gives us less pleasure (but owing to some random circumstances had a high initial anchor). If anchors and memories of these anchorsâbut not preferencesâdetermine our behavior, why would trading be hailed as the key to maximizing personal happiness (utility)?
S O, WHERE DOES this leave us? If we canât rely on the market forces of supply and demand to set optimal market prices, and we canât count on free-market mechanisms to help us maximize our utility, then we may need to look elsewhere. This is especially the case with societyâs essentials, such as health care, medicine, water, electricity, education, and other critical resources. If you accept the premise that market forces and free markets will not always regulate the market for the best, then you may find yourself among those who believe that the government (we hope a reasonable and thoughtful government) must play a larger role in regulating some market activities, even if this limits free enterprise. Yes, a free market based on supply, demand, and no friction would be the ideal if we were truly rational. Yet when we are not rational but irrational, policies should take this important factor into account.
Reflections on the Existence of Well-Defined Preferences
One of the lessons from Chapter 2 was that we generally believe we have precise and well-articulated preferences, but in reality, we only think that we know what we want. Hereâs an example of an experience where I went into a situation with one set of ideas about what I wanted and emerged with a very different understanding.
When I turned 30, I decided it was time to trade in my motorcycle for a car, but I could not decide which car was right for me. The Web was just taking off, and to my delight, I found a site that provided advice on purchasing cars. The Web site, which is now defunct, asked a series of questions ranging from my preferred safety rating to my desired braking distance, my ideal turning radius, the number of passengers Iâd like to be able to bring along, and, of course, my price range.
I spent fifteen minutes answering these questions. At the top of each page, I watched the progress bar inch closer to my result. It was excitingâI was really interested in seeing what kind of recommendation the site would come up with. The final screen displayed all the answers I had provided in the last fifteen minutes; all I had to do was click on âSubmitâ to receive my tailored recommendation. The second I did, I learned that my perfect car was (drum roll, please) a Ford Taurus.
What?
Now, I might not know much about cars (in truth, I know very little about them), but I knew that I did not want a Ford Taurus (and I donât mean any disrespect to what I am sure is generally a fine automobile). The problem was that, having just surrendered my motorcycle, I couldnât see myself driving such a sedate sedan. I was now facing a dilemma: I had tried a
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