Wednesday, July 30, 2008

Economic decisions - complex but not irrational?

In The New Republic (July 9, 2008), Alan Wolfe assesses recent books that claim that economic decision-making is irrational:
Economists used to believe that it was unnecessary to measure utility except in this way: the price that a person was willing to pay for something established its utility, and so there was no need to dig any deeper, to examine what was driving the psyche of the economic actor. But the behavioral revolution in economics challenges this assumption. It is based on the idea that we must look into that black box called the human mind to find out whether the things that we say we want really do give us pleasure. Utility, after the revolution, is no longer abstract. It is lived, experienced; it is existential. And fortunately, or so these books argue, the field of psychology has uncovered timely and fascinating truths about the ways our minds work, and these insights may breathe new life into the old idea of utility. Hedonic psychology, happiness research, behavioral economics, economic psychology, the study of well-being, judgment and decision-making--call it what you want. Suddenly everything we thought we knew about economics begins to look different.
In other words, if you think something makes you happy, it probably does. It may not be wise or good or right, but a decision to pay for it is based on many complex factors. Wolfe also offers a helpful caution:
... , I conclude that we should once and for all stop calling for revolutions in our understanding of ourselves, and end this remarkable presumption. In the long history of humankind, the social sciences were developed only recently, but we have been trying to figure ourselves out since we first began to think. It defies the imagination that one new methodology or theoretical assumption is going to topple all previous efforts to understand the human condition. Sometimes revolutions in our understanding of the world do happen--they tell me that Albert Einstein led one (and that, having done so, he spent the rest of his life running down the wrong paths)--but they are rare in the physical sciences, and they are next to nonexistent in the social sciences. Human beings are indeed charming and perverse and altogether fascinating creatures, and the study of ourselves is among the richest of intellectual endeavors. We ought to give ourselves a bit more credit than the revolutionists of the social sciences extend to us: we pursue many goals at the same time, and we do so in all kinds of predictable and unpredictable ways.
It pays to listen to what people actually say instead of trying to find out how a monkey would think about it.

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Animal minds: Monkeys understand money?

Well, no, they don't. And then again, who does?

Why is so much of our communal life governed by an entirely abstract concept? And if that does not help us see that the human mind is immaterial, what does?

Well, some do try to find other explanations.

In a "Cultural Animal "post coauthored with Kathleen D. Vohs, "The Evolution of Economic Rationality: Do Monkeys Understand Money?" Roy F. Baumeister reports at Psychology Today (July 15, 2008) that
Keith Chen and Marc Hauser at Yale University taught monkeys about resources that bear a strong resemblance to money. Monkeys don't care about money, per se, but they do care about marshmallows. (This already is a difference of gigantic proportions in that monkeys must learn about resource-exchange using something that is already a primary reinforcer - food - whereas humans can extend the range of their motivations to secondary reinforcers.)
That should have ended the experiment, if the object was to understand an abstraction as pervasive as the power of money, but ...
A resource (marshmallows) exchange task was introduced whereby pressing a lever would give another monkey a marshmallow; hence this was a task that involved a bit of altruism. Not only were monkeys taught about the game. Two specific monkeys were conditioned (entrained), such that one always pulled the lever for his monkey partner (thus being a very generous partner) and the other never pulled the lever for his partner (stingy). Then they let these conditioned monkeys play the game with other monkeys. Monkeys that played with the highly generous monkey figured it out and quickly took advantage of him. Monkeys that played with the stingy monkey also figured it out quickly and subsequently shunned or were aggressive toward him.

Thus, monkeys can at least understand and respond effectively to the difference between a generous provider and a tightwad. Still, the fact that these differences had to be done with marshmallows instead of a more abstract representation of value (which is what money is) suggests a limited capacity to use or understand money.
Apparently yrying to promote monkey intelligence over human intelligence, Baumeister proclaims,
If you and someone else worked equally to earn $100, and that person has the power to divide it and chooses to offer you only one dollar while keeping $99 for himself, well, you are still better off with one dollar than with nothing. Hence economic rationalists find it slightly scandalous that people ever refuse any offer. Economists think that if people were true to financial logic, they would act more like monkeys.
Well, only if they had nothing better to do, right? The rest of it gets slightly more interesting:
But a fully developed sense of fairness means that you are uncomfortable with being overbenefited as well. That is, it bothers you to get more than your fair share. Here is where humans seem to part company with other creatures.
Now herre Baumeister seems to connect with reality. Surely we have all suffered through overly lavish compliments, overly generous rewards? ... what's going on? (I did my job. Can't I just please go home now?) However,
What happens when monkeys overbenefit from an exchange - do they experience guilt, embarrassment, shame, or try to rectify the situation? Apparently not.
Well, monkeys wouldn't see the problem, would they?

In The Spiritual Brain, Mario and I spent some time on the problem of people tryingto understand human psychology from ape or monkey psychology. Basically, it doesn't work. Having a human mind, however you want to interpret it, really does make all the difference.

A number of interesting issues are raised in the Comments.

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