"SOVEREIGN in tastes, steely-eyed and point-on in perception of risk, and relentless in maximization of happiness.” This was Daniel McFadden's memorable summation, in $2006,$ of the idea of Every man held by economists. That this description is unlike any real person was Mr.McFadden's point. The Nobel prizewinning economist at the University of California, Berkeley, wryly termed homo economicus “a rare species". In his latest paper he outlines a “new science of pleasure", in which he argues that economics should draw much more heavily on fields such as psychology, neuroscience and anthropology. He wants economists to accept that evidence from other disciplines does not just explain those bits of behavior that do not fit the standard models. Rather what economists consider anomalous is the norm, Homo economicus, not his fallible counterpart, is the oddity.
To take one example, the "people" in economic models have fixed preferences which are taken as given. Yet a large body of research from cognitive psychology shows that preferences are in fact rather fluid. People value mundane things much more highly when they think of them as somehow “their own": they insist on a much higher price for a coffee cup they think of as theirs, for instance. than for an identical one that isn't. This “endowment effect” means that people hold on to shares well past the point where it makes sense to sell them. Cognitive scientists have also found that people dislike losing something much more than they like gaining the same amount. Such 'loss aversion' can explain why people often pick insurance policies with lower deductible charges even that they are more expensive. At the moment of an accident a deductible feels like a loss, whereas all those premium payments are part of the status quo.
Such tools have Implications for policy. Plenty of poor people in America are wary of programmes like the Earned Income Tax Credit (EITC) because the idea of getting a handout from the government reinforces a sense of helplessness. Dignity is not something mainstream economics has much truck with. But creating a sense of dignity turns out to be a powerful way of affecting decisions. One study by Crystal Hall, Jiaying Zhao and Elder Shafir, a trio of psychologists, found that getting poor people in a soup kitchen to recall a time when they felt “successful and proud" made them almost twice as likely to accept leaflets that told them how to get an EITC refund than members of another group who were merely asked about the last meal they had eaten.
Taking the path Mr.McFadden urges might also lead economists to reassess some articles of faith. Economists tend to think that more choice is good. Yet people with many options sometimes fail to make any choice at all: think of workers who prefer their employers to put them by "default” into pension plans at preset contribution rates. Explicitly modelling the process of making a choice might prompt economists to take a more ambiguous view of an abundance of choices. This is undoubtedly messier than standard economics. So is real life.
The view mentioned in the last paragraph (“Taking the path... real life”) refers to which of the following?
- People are loath to make any choice when faced with a plethora of options.
- Consumers prefer to seek expert guidance while making a choice.
- Employers coax workers lo accept pension plans with fixed contribution rates.
- The view that more choice is good for consumers should be regarded with skepticism.