Intrinsic Bad Behavior

From Hypothetical Bias --

Dan Ariely, the center's visiting scholar and an MIT professor, is examining why people might pay prices greater than the intrinsic value of a good or service, which could have implications for policies that rely on market forces to deliver equitable results.

Ariely's research shows people often don't have a good idea of what something is worth, which makes them susceptible to manipulation. He calls it ''Tom's law," referring to the Mark Twain character, Tom Sawyer, who convinces friends to pay for a chance to do what would otherwise seem an unpleasant chore, whitewashing a fence.

''People's willingness to pay is not always determined by supply and demand," Ariely said. ''Sometimes, they just don't know what to pay."

It only goes to show that bad ideas live forever. Intrinsic value should have disappeared from economics centuries ago.

Mind over Money

Behavioral research may explain why people spend and save the way they do
By Robert Gavin, Globe Staff | December 19, 2005

This relatively young field has produced insights that challenge accepted economic principles. For example, traditional economics teaches that choice is good, and the more choices the better. But behavioral economics has shown too many choices can confuse people and ultimately prove ineffective.

In one experiment, behavioral economists set out six samples of fruit jams at a grocery store, enticing 30 percent of shoppers to buy jam. The researchers then increased the samples to 24. According to established theory, that should have led to more purchases. Instead, jam buyers fell to 3 percent of shoppers.

My unestablished theory would predict that given 24 fruit jams, I wouldn't care if there actually were a pony in there.

Another economic principle holds that people always seek to maximize returns. But behavioral economics suggests avoiding loss is a more powerful motivator, and could, via evolution, be deeply ingrained in human nature.

At Yale University, Keith Chen, an economist, and Laurie Santos, a psychologist, taught Capuchin monkeys to buy food with metal chips. The monkeys were given a choice: They could buy one grape, with a 50-50 chance of winning a second grape, or get two grapes at the same price, but with a 50-50 chance of losing one.

In other words, the chances of ending up with just one grape were the same. Researchers expected the monkeys to simply buy the most food presented to them. But three out of four times, the monkeys chose to buy a single grape. The explanation: The monkeys didn't want to risk a loss.

This supports the case for letting monkeys write the papers and earn the economics doctorates. Behavioral economists would make good experimental subjects with minimal lost opportunity cost. While most of Shakespeare's work is thought to have actually been authored by monkeys, no behavioral economics paper has ever been found to have grape stains.

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So anyone whose reservation

So anyone whose reservation price is above (or below for that matter) the market price is per se irrational?

I guess that makes eBay anti-capitalist.

Go figure...

Who are these behavioral

Who are these behavioral economists? I don't know very much about them. It seems reasonable to represent the view that man is more complicated than "homo-economus". Are they predominantly on the left, using their insights to justify government intervention into the decision making process?

Anyone ever read any Mises?

Anyone ever read any Mises? Rothbard?

Value is subjective, based on the utility perceived to be derived from the actor. Duh!

The monkeys obviously need

The monkeys obviously need protection from the government so they won't make bad choices anymore. Word on the street is that Hilary! is drafting legislation as we speak.

"Who will protect the monkeys?"

We also obviously need a

We also obviously need a National Jam Agency to decide what the six official flavors of jam will be.

Not sure how the monkeys

Not sure how the monkeys understood how to play the game.

podraza, The behavioural

podraza,

The behavioural economists are not predominantly lefties, it's just idiot lefties that tend to abuse their research to support policies that don't necessarily even follow from the findings. Vernon Smith, for example, is pretty libertarian and would be quick to point out that behavioural economics has just as much to say about the biases of regulators and legislators as it does about consumers. Richard Thaler is pretty free-market too, but he reccommends a modest "libertarian paternalism", which I don't find especially convincing. I don't know where Kahneman & Tversky come down on the political spectrum.

Matt, The problem with the

Matt,

The problem with the Behavioral Economists is their general economic cluelessness. They can't distinguish economic value from price, don't understand mutual voluntary exchange, and all else follows.

Regards, Don

Two very basic errors I

Two very basic errors I see:

"People’s willingness to pay is not always determined by supply and demand."

Well...duh. No one ever said it would be. In fact, economics says the exact opposite: demand is derived from willingness to pay.

At Yale University, Keith Chen, an economist, and Laurie Santos, a psychologist, taught Capuchin monkeys to buy food with metal chips.

Monkeys aren't people.

At Yale University, Keith

At Yale University, Keith Chen, an economist, and Laurie Santos, a psychologist, taught Capuchin monkeys to buy food with metal chips.

Summary of the research from Economist (subscription required).

"The monkeys were given a

"The monkeys were given a choice: They could buy one grape, with a 50-50 chance of winning a second grape, or get two grapes at the same price, but with a 50-50 chance of losing one."

So, if I understand this correctly, no matter which choice they made, they had a 50-50 chance of ending up with one grape or two. Fascinating. :roll:

The monkeys apparently

The monkeys apparently understood the game. However, from the description, I don't understand the game. That makes me, what, dumber than a monkey I guess.

Value for Statists Don Lloyd

Value for Statists
Don Lloyd links to some dim economics writing. KipEsquire and Stormy Dragon provide amusing responses in the comments.

The monkey experiment

The monkey experiment appears incomprehensible as it is described. Perhaps it happened in this way:

The monkeys have a choice of two "vending" machines, in one of which (#1) they see one grape, while in the other (#2) they are shown two grapes. Obviously, the experimenters must be able to somehow satisfy us that "to be shown" = "to be offered." The point is, the monkeys understand that the two machines are making two different offers.
Both machines accept the same single "coin" (ie, the price is the same for both).
However, regardless of the different "offers" made by the two machines, both produce the same random result of one or two grapes with equal consistency.

The experimenters state that the monkeys prefer machine #1.

Duh!

Who would'a thunk that monkeys prefer pleasant surprises to sad disappointments? Machine #1 is a lottery that cannot be lost--its return is always at least one grape--and might be won. The second machine is nothing but a tease. (What if machine #2, still "offering" two grapes for one coin, had returned an equal random distribution of one, two, or three grapes?)

It's hard to see how the experimenters can claim that the monkeys are "avoiding loss" when even monkeys, over time, can figure out that the return on one coin is the same for both.

“We also obviously need a

“We also obviously need a National Jam Agency to decide what the six official flavors of jam will be.”
Comment by Stormy Dragon — December 20, 2005 @ 11:43 am

This is a good idea. They could work in the same office where they test the flow rates of catsup as they have been doing since 1953. In fact NASA has put out a workbook telling how to test catsup and has even apparently found that it won’t pour in outer space. I’m not kidding, see media.nasaexplores.com/lessons/03-040/5-8_2.pdf
I believe monkeys could be taught to do this. They could be recruited from retired NASA space monkeys or those economist monkeys we are talking about, thus saving the taxpayers money.

I believe monkeys could be

I believe monkeys could be taught to do this...thus saving the taxpayers money.

Especially if we pay the monkeys in grapes, and take half of them away as income tax.

Why do we pay more than the

Why do we pay more than the value of a good or service? Because we're tricked and seduced into doing it.Advertising focuses and takes advantage of the irrational aspects of our psychology in order to motivate us to pay more than somethings worth. You'd expect Businesses to go in that direction if the amount saved in R and D costs and efficiency maximization outpaced the amount spent on advertising in marketing, which I suppose it must, according to market principles. (there are other good explanations as well, but I figured that one would have the most verisimillitude for you guys.) Compare the market for "Jam" with the stock market, the latter of which actually functions like a real market. Here's Chomsky:

"...If you have a real market you don't advertise: you just give information... If you have ten shares of General Motors that you want to sell, you don't put up an ad on television with a sexy model holding up the ten shares saying "ask your broker if this is good for you; it's good for me," or something like that. What you do is you sell it at the market price. If you had a market for cars, toothpaste, or whatever, lifestyle drugs, you would do the same thing. GM would put up a brief notice saying here's the information about our models. Well, you've seen television ads, so I don't have to tell you how it works. The idea is to delude and deceive people with imagery."

That really just points to the failure of markets in most aspects of our everyday life.

In case you're not persuaded by Chomsky (who am I kidding, you probably skipped it), let's try an analogy. Suppose you talk a woman into sleeping with you by telling that you love her and that you wanna marry her and have children and a family with her. The next morning you leave and never speak with her again; she was duped. My guess is that any argument you'd care to come up with to defend Jam sales against my above critique will also imply, analogously, that all this woman really wanted was sex. This of course misses the vital point, which is that the seducer in this case is taking advantage and preying on irrational aspects of this seducee. It's just like saying that someone wants sprite when they really just want to be LeBron James and are made to subconsciously believe that drinking sprite will get them there.

Of course, we're a long way from intrinsic value, something I'd be happy to defend (though no, not Marx's labor theory of value) if anyone's interested.

Matt

Don, I think looking at

Don, I think looking at things so abstractly does us no favors here. I don't see how it would limit voluntary exchange, unless you make the (rather foolish) assumption that a person produces all the goods they need and want. Someone who specializes in producing wheat would certainly be interested in trading with someone who produced alchohol and roughly speaking the assumption of classical economics would be that this exchange value would gravitate toward the number of sraffian labor hours (an estimate that includes the "dead" labor in machinery) neccesary for production.

Matt, Of course, we’re a

Matt,

Of course, we’re a long way from intrinsic value, something I’d be happy to defend (though no, not Marx’s labor theory of value) if anyone’s interested.

Be our guest.

The first part of what you describe above deals with money and prices. Value is more basic and is the basis of voluntary exchange. If value were indeed intrinsic, then the planet would still be sparsely populated by warring tribes.

Regards, Don

The difference between

The difference between shares of stock and bottles of water/ ie Perrier Water vs. distilled water you put in your car battery is that there are really material differences between shares of stocks. For example I would rather have bought 100 shares of Daimler- Chrysler than GM.
You are a little too cynical though. If you irrationally think the Perrier Water tastes better than the battery water, you really do experience increased value. There are also social factors, snobbery etc. that are not the advertisers fault. They are the fault of you and your friends.
Suppose you had a party and used distilled battery water out of a plastic jug to mix the Jack Daniels you were serving your friends. You would soon be a social dud. You should not blame the Perrier people for the situation.
I doubt that I will soon be invited to a party at Noam Chomsky’s home but if I did go I doubt if I would see all his accoutrements covered in brown paper with military style labels.
What advertisers are really selling/ creating is esthetic and social value. Even the most primitive people seek this beyond the bare basic physiologic necessities. That is a human characteristic.
If you did what that mean man in your example did, you would be building your individual reputation among men and women as a real stud/bad boy so you would get more dates while giving men in general a black eye, thus confirming angry feminist doctrine, so please don’t do it.

The first part of what you

The first part of what you describe above deals with money and prices. Value is more basic and is the basis of voluntary exchange. If value were indeed intrinsic, then the planet would still be sparsely populated by warring tribes.

Not sure I understand, Don. In Classical economics, the theory of Value was a theory of long-term prices. It's useful to view neoclassical economics as simply claiming that short-term prices and values are the same thing, which is effectively what you/they do. As I understand, guys like Bastiat aren't claiming that Value doesn't exist, but only that it's subjective and can therefore only be determined at the point of market exchange. The warring tribes comment mystifies me though, I must say. If hope you don't think I'm claiming that labor AND machines (contra Marx) can't add value, because I think they can.

Dave, A few things: A. the

Dave,
A few things:
A. the things you claim are natural are typically assumed not to be so by advertisers, who are very conscious of creating wants and needs. In fact there has been plenty of literature documenting these trends, and in every recent case I know of, the advertising push has preceded the corresponding change in consumer opinions/desires/wants/needs.

B. It's not only the question about whether certain water tastes better, but about how important the taste of water is in your life. Whiling away your time and money on conspicuous consumption (even if there is some kind of difference in taste) while people starve is immoral.

Primarily though, I just don't think you answered the basic point. If taste and status do matter and are natural, that doesn't explain why advertisers have to spend millions shoving them down our throats. In fact, a situation like Chomsky describes is certainly consistent with the idea we care about the taste of water or the social status it confers. But what about commercials implying that drinking a brand of water will get us laid, or trying to associate the water with a celebrity. Certainly you wouldn't argue that drinking water with the false hopes that it will get us laid is actual value added. It's obvious manipulation.

There are material differences between products just as there are between stocks (you use Chrysler vs. GM as an example), and if there aren't then there's really no good reason for any difference in price.

Matt, Not sure I understand,

Matt,

Not sure I understand, Don. In Classical economics, the theory of Value was a theory of long-term prices. It’s useful to view neoclassical economics as simply claiming that short-term prices and values are the same thing, which is effectively what you/they do. As I understand, guys like Bastiat aren’t claiming that Value doesn’t exist, but only that it’s subjective and can therefore only be determined at the point of market exchange. The warring tribes comment mystifies me though, I must say. If hope you don’t think I’m claiming that labor AND machines (contra Marx) can’t add value, because I think they can.

Value long preceded money. If value were intrinsic, then every good would have the same value for each individual. This would limit voluntary exchange to cases of mistake or fraud. Even then the benefits of exchange would be miniscule for the beneficiary compared to those of theft and conquest.

In fact, no economic value can exist without a valuer. All values are subjective, highly subject to diminishing marginal utility and simultaneously evaluated on two axes, i.e. subjective use-value and exchange value. At any moment, the economic value is the one of the two that is ranked higher by the valuing individual.

If I have two riding horses and you have two saddles, then a potential exchange exists which would leave us both much better off.

My first horse, if only I had a saddle, would have a high subjective use-value as a means of both transportation and enjoyment. My second horse, OTOH, only has a much diminished use-value, as I am only able to ride one horse at a time, but it may have significant exchange value.

The same considerations apply to you and your saddles.

The idea of an intrinsic value would deny both diminished marginal utility and the possibility that two individuals could rank two goods to be exchanged in reverse order. It would also deny the possibility of the division of labor except under slavery.

Regards, Don

Matt, Don, I think looking

Matt,

Don, I think looking at things so abstractly does us no favors here. I don’t see how it would limit voluntary exchange, unless you make the (rather foolish) assumption that a person produces all the goods they need and want. Someone who specializes in producing wheat would certainly be interested in trading with someone who produced alchohol and roughly speaking the assumption of classical economics would be that this exchange value would gravitate toward the number of sraffian labor hours (an estimate that includes the “dead” labor in machinery) neccesary for production.

The purpose of production is a combination of production for self use and for exchange. No voluntary exchange can take place if what you produce is not valued for use by some one else more than what he has to exchange to you. And vice versa.

It makes no difference how much labor and other resources you put into the production of a good if no one is willing to trade you something you want for it. In fact, labor and all other resources only have economic exchange value to the extent that the final goods that can be produced have use value to someone.

Regards, Don

The marketers try to

The marketers try to increase their client’s edge, using psychological methods. The information imparted is not necessarily bogus. OK, so Chrysler comes out with the Hemi Engine and is able to get $5000.00 more profit per unit. They pay Snoop Doggy Dog to endorse it. So the Hemi Engine won’t get you anywhere that the economy six won’t. But this is how Chrysler competes. GM is putting out boring cars that people don’t want. They are about to go bankrupt.
In your world Chrysler would never introduce the Hemi or if they did they would not advertise it but would have a label saying Ralph Nader said it was safe. They would charge the same as GM. The difference in the profits would be used to feed the poor, right?
This assumes a rather static world and a boring one at that. Anyhow, how will this be enforced? Presumably as a member of the liberal persuasion, you would advocate some type of coercive collectivist approach.

Don- The purpose of

Don-

The purpose of production is a combination of production for self use and for exchange. No voluntary exchange can take place if what you produce is not valued for use by some one else more than what he has to exchange to you. And vice versa.

your particular valuation of a good will not be reflective of the market value, because the fact the you produce the good would usually mean that you have an individual surplus, which will affect short term price. The value, which has most to do with the amount of neccesary labor hours, will only be altered in special 2 person's trading scenarios, in which it's really not a market setting the price. Market pricing will tend to reflect the neccesary labor hours involved in production, which is the basic point. You may well be right about the horse-saddle situation, but it has nothing to do with market pricing. It'd be like proving to someone that they should sell you an original vermeer for $.95 just because if they were on a desert island with only the vermeer, they would probably trade it for a can of beans. The assumptions you are making are called "domain assumptions", and render your theory inapplicable (assumption types are worth looking into anyway, esp. if you're planning on reading that idiot Milton Friedman.)

It makes no difference how much labor and other resources you put into the production of a good if no one is willing to trade you something you want for it. In fact, labor and all other resources only have economic exchange value to the extent that the final goods that can be produced have use value to someone.

yes, but that's really beside the point; a market should be able to quickly weed out any goods which aren't useful, and any theory of pricing which included good which will only remain on the market for a second would about as useful as a theory of wildfires based on spontaneous combustion.

Regards, Matt

The marketers try to increase their client’s edge, using psychological methods. The information imparted is not necessarily bogus. OK, so Chrysler comes out with the Hemi Engine and is able to get $5000.00 more profit per unit. They pay Snoop Doggy Dog to endorse it. So the Hemi Engine won’t get you anywhere that the economy six won’t. But this is how Chrysler competes. GM is putting out boring cars that people don’t want. They are about to go bankrupt.
the real assumption here, that both car makers and nearly all advertisers have already forced us to swallow is that it somehow really matters whether your vehicle of choice is "boring." I've bought it, you've bought, but is it rational? No way. It allows to manufacturers to produce an inferior product and sell it for more by tricking you. One way to see it is to consider whether you actually (for instance) consistently feel younger and more fun by drinking pepsi... You subconsciously consider that when buying it (which is what pepsi cares about) but nearly noone has that experience when they consume pepsi. It's not a quality we enjoy; it's a trick. It's like the guy who seduces the girl by talking about marriage or something and then leaves her the next day. She can't claim that he promised marriage (if he was smart he probably didn't), but we all know what went on.

In your world Chrysler would never introduce the Hemi or if they did they would not advertise it but would have a label saying Ralph Nader said it was safe.
no, if people were genuinely interested in speed (on their own) they could look at motor trend's reports on the car. Hell, chrysler could even cite the motor trend stats. They just wouldn't waste their time trying to convince you that driving a car of unspecified speed will make you a carefree rich guy.

They would charge the same as GM. The difference in the profits would be used to feed the poor, right?

Actually, yeah I'd like that.

Anyhow, how will this be enforced? Presumably as a member of the liberal persuasion, you would advocate some type of coercive collectivist approach.

well, a market economy should have produced it. If consumers were rational this is exactly what you'd see. In fact, I bring this up not because I think this is the best possible world (though I wouldn't mind it) but because the fact that it doesn't exist basically represents a failure of markets.