Should We Really Behave Like Economists Say We Do? Full Transcript
This is a transcript of the Freakonomics Radio podcast “Should We Really Behave Like Economists Say We Do?”
[MUSIC: Milan Grajetzki, “A Fistful of Soul” (from Good Life)]
Stephen J. DUBNER: All right. Let’s start with your name.
Greg ROSALSKY: My name is Greg Rosalsky.
DUBNER: To people who listen to this program — especially if they get all the way to the end, to the credits — your name is a familiar name, yes?
ROSALSKY: I guess? I’m a producer at Freakonomics Radio.su
DUBNER: How you liking your job, by the way?
ROSALSKY: It’s great, I mean, you know …
DUBNER: Of course, I am your boss. You’re not really gonna say otherwise. Greg, you are what might be called — at least, I might call you this — a real fan of economics. Would you say that’s accurate or no?
ROSALSKY: Yeah. On a typical Friday night, if it’s going well, I’ll open up a microeconomics textbook, and just … No. More seriously, I’m a huge fan of economics. I studied it at grad school.
DUBNER: You read econ papers, not for fun, but for your job, for Freakonomics Radio. But you like it. You blog, right? A Blog Called Wonk is your blog.
ROSALSKY: Yeah, I write about economics.
DUBNER: I remember when the two of us were at the American Economic Association annual meetings in Boston. Yyou looked like my daughter at a One Direction concert, a little bit. I’ll be honest with you. You were into it!
ROSALSKY: I was very into it.
DUBNER: All right. In your studies — having studied econ and public policy at the Woodrow Wilson School at Princeton, correct?
ROSALSKY: That’s right.
DUBNER: In your studies of economics, you have surely come across a character that’s a model for how economists or economics predicts that humans behave known as homo economicus, yes? Do you remember learning about him?
ROSALSKY: Absolutely. If you’ve ever taken an economics class or read an article from a huge cross-section of academic papers, it’s hard not to encounter this creature. Academics might not always refer to him by name, but implicitly their models usually assume that the people they’re modeling are hyper-rational and always work to make themselves as best off as possible.
DUBNER: Would you say that what you just described — hyper-rational and working to maximize or optimize your choices and your decisions — does that describe you, as a human?
ROSALSKY: No, I don’t think so, actually.
DUBNER: Would you like it to?
ROSALSKY: I think so. Like most people, I think that my brain has various biases and heuristics and emotions that cloud optimal decision-making. I think I would be personally better off if I behaved that way. But I’m not quite sure if society would be better off.
[MUSIC: Pailboy, “Shut Up”]
DUBNER: Well, all right. Why don’t we do this then: let’s give it a try. Let’s undertake a mission to make you, Greg Rosalsky, better off, as you put it, by becoming more like homo economicus, to try and live your life a little bit more the way that economists would describe the way someone should live their lives. Are you up for that mission?
ROSALSKY: Definitely. It sounds like an adventure.
DUBNER: Now, you are a very bright guy, I know. But still, it would be nice, don’t you think, to have some personal tutor, like a Virgil to walk you down into the depths? Some kind of economics therapist, maybe, to walk you through these decisions. You like that idea or no? You want to go on your own?
ROSALSKY: Yeah, for sure. Given [that] many academics think that nobody behaves this way, it would be really helpful to have some adviser. Or you could call him a therapist.
DUBNER: Okay. Does any particular econ-therapist come to mind?
ROSALSKY: Are you thinking of who I’m thinking of?
DUBNER: Yyou know what, there’s a good chance. Hang on. On the count of three, we’ll see if you’re thinking what I’m thinking.
DUBNER: One, two, three.
“Thaler” is Richard Thaler.
Richard THALER: I’m a professor of economics and behavioral science at the University of Chicago Booth School of Business.
[MUSIC: Two Dark Birds, “Start All Over Again” (from Songs For The New)]
But he’s more than that. Thaler, 69 years old, is one of the founders of the field that has come to be known as behavioral economics — which, to be very short-handy about it, runs homo economicus through a few layers of psychological understanding to see how real people actually behave. Thaler has been doing this work for many years. But his public breakthrough came a few years ago, when he co-authored a book with the legal scholar Cass Sunstein:
THALER: We ended up calling our book and the tools we use ‘nudges.’
In Thaler’s view, if you want to get people to do more of what they should be doing — save more money for retirement or eat more nutritious food or break some bad habit — sometimes you have to nudge them into doing so. Because most of us don’t necessarily respond to incentives as rationally as economic theory would predict. Because most of us, from the economist’s perspective, misbehave. Which is the theme of Richard Thaler’s new book.
THALER: The book is called Misbehaving: The Making of Behavioral Economics.
Misbehaving is Thaler’s very entertaining chronicle of how he came to recognize that the standard economist’s model of human behavior is beyond the reach of most of us.
THALER: The economic model of behavior really can be summarized by one word, which is ‘optimizing.’
And at the center of this model is the creature that our producer Greg Rosalsky hopes to become.
THALER: This mythical creature is called homo economicus. I call them ‘econs’ for short. None of us know any econs. An econ can make any calculation perfectly accurately, has no self-control problems, makes accurate forecasts. He’s not over-confident. Has no emotions.
So can we take Greg, a perfectly nice and intelligent 30-year-old man, and under the tutelage of Richard Thaler, turn him into an econ? And even if we can, would that be a good idea? That would mean sending him out into the world, interacting with all sorts of people — and let me warn you, it isn’t always gonna be pretty.
COMMUTER: I’m tired. I came from work. Go away.
COMMUTER: Nah. Don’t waste your time, man.
Rachel INMAN: Whoa, whoa, whoa! Okay, yeah.
COMMUTER: Some random jerk.
MUSICIAN: Yeah, that will trigger my like freeloader trigger.
COMMUTER: 50 cents. Nah, that’s not worth it.
INMAN: Promise to never act like this again.
* * *
[MUSIC: Heavy G and the Boogaloo Communicators, “Ms. Persuasive”]
Today I’m turning the mic over to Greg Rosalsky, a producer here at Freakonomics Radio, who’s teaming up with the economist Richard Thaler to try living as homo economicus, a supremely rational being. As a longtime practitioner of behavioral economics, Thaler has the kind of experience that could make him a good adviser.
ROSALSKY: In my quest to become homo economicus, the model of human behavior still taught in economics 101, there may be no better advisor than Richard Thaler. He’s actually been described by a colleague as “the world’s only clinical economist.” That’s sort of like being a therapist — except he uses principles from economics to improve people’s lives. He’s done this casually for his friends over the years, and it’s sort of what he’s evolved to do professionally.
THALER: You can think of Nudge as the culmination of my career as a clinical economist. Because what Cass and I tried to do in that book is help people think about organizing their lives in a more successful way, and helping governments and the private sector create institutions that allow people to achieve their goals more helpfully.
ROSALSKY: Nudge had a huge influence in public-policy circles. Cass Sunstein ended up directing regulatory policy for President Obama while Thaler advised a bunch of governments, including Britain, which set up an office nicknamed the Nudge Unit. That office nudged citizens to do things like quit smoking, find jobs, pay their taxes on time, and conserve energy. And the Nudge Unit reportedly did all of this while saving British taxpayers tens of millions of pounds. So who better than Thaler to teach me how to become homo economicus?
THALER: I’m not sure that I will teach you to become homo economicus. But go for it. Tell me what your problems are and I’ll put you on my couch. I hope you’re lying down.
ROSALSKY: I’m in a seat. It’s a very comfortable seat.
THALER: Okay, that’s good.
ROSALSKY: Okay. Professor Thaler, I have a little problem. Every morning I commute from Brooklyn to Manhattan on the subway and it’s always so crowded that I can’t get a seat. This means that I can’t sit down. I can’t enjoy my morning coffee. I can’t read the morning news. It’s a pain in the butt. Thinking like an economist, I devised a little experiment…
[MUSIC: Phil Symonds, “Spring Delight”]
ROSALSKY: How much would I have to pay you for that seat?
COMMUTER: I’m sorry?
ROSALSKY: How much would it cost for you to move from your seat? How much would somebody have to pay you?
COMMUTER: To move from my seat?
ROSALSKY: Excuse me, could I ask you a question?
COMMUTER: How much would they have to pay me… What?
COMMUTER: 80 dollars.
ROSALSKY: 80 dollars?! That seems pretty steep.
ROSALSKY: The people on the subway have a temporary property right to their seats because they got there first. So in my effort to become homo economicus, it seemed like the best thing to do was just pay them for their seats. I wanted to do this for as little money as possible. But sometimes people asked for things I just couldn’t give them.
COMMUTER: I don’t know. To not feel like [BLEEP] right now and not have to go to work. That’s how much.
ROSALSKY: I was hoping a quarter or two would do it.
THALER: I think you’re behaving like a very good economist. But my guess is that you get very few takers.
COMMUTER: I would get up for you.
ROSALSKY: You “wouldn’t,” but there would be a price, though, right?
COMMUTER: If you had 100 dollars that you were gonna to give me. I would probably do it.
ROSALSKY: If I had just 10 bucks. I was like, “here.”
COMMUTER: Nah. Long day. Have a comfortable seat.
THALER: Probably a lot of dirty looks and possibly worse.
COMMUTER: I would definitely get up for somebody who needs to sit down, like an older person or a pregnant person. But if it’s just some random jerk, then I’m going to be like, “I’m going to keep my seat. Thank you.”
ROSALSKY: One thing I learned about trying to buy seats from people is that there are a couple social norms when it comes to subway seats. The first one was that people thought I was a weirdo …
THALER: Right …
ROSALSKY: Because seats are not thought of as for sale.
THALER: Because you were acting like an economist.
ROSALSKY: How much would I have to pay you?
COMMUTER: I don’t know.
COMMUTER: That’s a weird question.
ROSALSKY: The second social norm I encountered, which was actually one in which people said they were willing to move from their seat if I were elderly, injured or pregnant.
COMMUTER: It depends on who the somebody was.
ROSALSKY: What about me?
COMMUTER: Limitless. There is no price.
ROSALSKY: How about you? How much would it cost for you to move from your seat?
COMMUTER: How much are you willing to pay?
ROSALSKY: Let’s say, like …
COMMUTER: No, no! How much are you willing to pay? Let’s not “say.” Let’s just say what are you going to pay me to get out of my seat.
ROSALSKY: How about 50 cents?
VOICE: 50 cents? Nah, that’s not worth it. If you were a kind old lady, I would just get up for free.
ROSALSKY: That brings up the question: how does homo economicus deal with social norms?
THALER: Homo economicus doesn’t much pay attention to social norms unless it’s going to hurt them financially. I can see homo economicus running that experiment and not having a lot of success. A real homo economicus would bring a cane with them when they commute. Try that, maybe even a fake cast.
ROSALSKY: Okay, this is really smart.
THALER: I think that will do it for you.
THALER: I’m going to start charging though for this advice.
ROSALSKY: You are a terrific clinical economist, I must say.
THALER: Thank you, thank you.
ROSALSKY: Would homo economicus give up his or her seat to a stranger on the subway?
THALER: They would if the money they were offered was greater than the utility of sitting.
COMMUTER: You can’t buy my seat! I’m tired, I came from work. Go away.
ROSALSKY: I’m going to ask other people. How about you, ma’am? How much would I have to pay you for your seat?
VOICE: If you want it really badly, you can have it for nothing.
[MUSIC: JOL, “Life In The Sun” (fromLife In The Sun)]
ROSALSKY: If I were really homo economicus — I would have taken advantage of that kind old lady. That doesn’t sound very nice, does it? Which brings up the question: why in the world would I ever want to be homo economicus? Well, there are a few things that are really appealing. First off, econs, as Professor Thaler calls them, always do something called constrained optimization, which is a fancy math term that just means they are really, really good at making themselves as happy as possible. So that means econs always save, invest, and consume in a way they won’t regret.
THALER: They do exactly the right thing, all the time. No econ has ever had a hangover.
ROSALSKY: Sounds nice. Econs don’t have self-control problems. They always have the willpower to commit to their goals.
THALER: If he says he’s gonna go on a diet next week, he goes on a diet next week.
ROSALSKY: And they always follow the bedrock principles of economics, like ignoring sunk costs. For example, let’s say you go out to dinner at a fancy restaurant that has a prix fixe menu, so no matter what you’re gonna get an appetizer, main course, and dessert all for one price. After downing the main course you’re really full. But then the dessert comes and you tell yourself, “I just have to eat that piece of cake because I don’t want to waste money.”
THALER: If you do that then you’re human, but you’re misbehaving. Economic theory says the only thing that matters is how much it costs you to eat that cake, which is zero, not how much you paid for it. That’s the sunk cost.
ROSALSKY: So econs don’t fall for the “sunk-cost fallacy.” Which is doing something that will make you less happy only because you’re worried about losing moneys — even though that money is gone forever. It’s sunk. You can’t get it back. So it shouldn’t affect your decisions going forward. I don’t know about you. But I fall for this kind of thing all the time. These are just a few examples of why being an econ sounds pretty appealing when it comes to how we should behave. But, as Thaler says, it’s not how we actually behave.
THALER: It’s a creature that is unrecognizable. I’ve never met one.
[MUSIC: Clay Ross, “Army For You” (from Entre Nous)]
ROSALSKY: That’s even though this model of behavior, still taught to students around the world, has dominated the discipline for Thaler’s entire career.
THALER: I started early in my career noticing ways in which people behaved that were different from the way they were supposed to behave. That they were misbehaving — thus the title of my book. It started just with making a list of funny things people do. That list has grown and has, some 40 years later, turned into a field.
ROSALSKY: This field, behavioral economics, sparked a huge debate — and it’s one that matters for all us. When you sign up for a new job, should your company give you a gazillion options for your retirement plan — or should it make it easy by giving you a default option? If you believe we’re all econs, we should get as many choices as possible. And the default shouldn’t matter. But if you believe we’re feeble humans. That we can be overwhelmed by choices, be lazy, and ignore fine print. Then a good default option would be best. The default is one of many examples of Thaler’s nudges. A nudge is an intervention that changes your behavior, but one in which you are free to ignore if you want.
THALER: You can think of an example of this as handing somebody an alarm clock. If they have trouble getting up in the morning, an alarm clock is a very useful tool. But you can hit the snooze button or turn it off.
ROSALSKY: Thaler says that companies and governments should make more use of policies that function like alarm clocks. And he and his colleagues have worked hard to do just that. They’ve also inspired the invention of new technologies. Here’s an exercise idea proposed on a previous Freakonomics Radio episode by professor Katherine Milkman of the University of Pennsylvania.
Katherine MILKMAN: Imagine that you took a company like Netflix and you called it Gymflix. You let people set aside certain TV shows for gym-only access. My research suggests that a product like that might be very attractive to people.
ROSALSKY: If we were all econs, something like Gymflix wouldn’t motivate us to workout more. But Milkman has evidence that it does. Yet the debate continues. One of the most contentious ones is about financial markets. Models that assume that we all behave as rationally as econs say there won’t be problems like stock market or housing bubbles. Thaler calls this prediction “the price is right,” like the game show.
[MUSIC: The “Price Is Right” theme song]
Those who believe “the price is right,” and always right reject evidence from the lab. They argue that in the real world, competitive markets force investors to be rational. After all, they say, investors will lose tons of money if they aren’t. Behavioral economists like Thaler disagree. They argue that prices — such as the valuations of companies — are often wrong. Sometimes very wrong. They believe bubbles exist because we make systematic mistakes. That we misbehave. This view has gained popularity in recent years, but there are still strong defenders of the traditional model, which is sometimes known as rational choice.
[MUSIC: The Mackrosoft, “Angiogenesis” (fromUpgrade)]
ROSALSKY: The devil’s advocate — and this is probably a lot of your colleagues at the University of Chicago, probably less than there were when you were first starting off — but they say, “Sure. Human beings don’t behave exactly as the rational choice model predicts. But within competitive markets, where there are high stakes and simple rules to follow, these models have been tremendously powerful when making predictions, at least on average.” What do you say to those types of arguments?
THALER: I would say two things: one, in the book I coin a possibly obnoxious phrase called the “the invisible hand wave.” You were basically using the invisible hand wave in the question you asked me. The idea that somehow people will misbehave in the lab, but then when they get out in the real world they behave just like an econ … Did people live through the last eight years? When we had a housing bubble and people were giving mortgages to people who can’t afford them, people were taking out those mortgages and then getting in trouble when house prices fell. The notion that somehow markets are gonna force people to be rational is just silly.
ROSALSKY: But Thaler doesn’t think it’s silly for us to aim at becoming econs.
THALER: It would be great if we all had a spreadsheet that was running constantly in our brain and making calculations.We would be better off having expectations that lined up with reality. We would be better off if we didn’t have a third of the population that was obese. Most of the time it would be better if we were all econs.
ROSALSKY: Thaler has a big exception to this, which you’ll hear in a bit. But one area he thinks we’d be better off acting like this creature is when we make decisions under uncertainty; like how we should make investments or pick a job. In the real world, we don’t always do this right. We do quirky things. Like, valuing what we hold more when it’s taken away from us than when it’s given to us. And miscalculating the odds of events, or the value of investments, because of how many times we hear about them on the news. Thaler says we’d be better off following the rational model of making decisions when there’s uncertainty: it’s called expected utility theory.
THALER: The theory is really quite simple, at least in principle. If you are considering some risky option, look at the probabilities, compute the utilities, calculate and pick the best thing.
ROSALSKY: Professor Thaler, relationships are big investments. And, um…
ROSALSKY: Yeah. I’ve been dating this girl for a few weeks now, and I’m thinking about using expected utility theory in order to decide whether or not to ask her to be my girlfriend. How would an econ go about making this decision?
THALER: The first thing you would have to do is — econs always think about opportunity costs. You have to compare this girlfriend to all the possible other girlfriends. Now, you do have training in economics, right?
ROSALSKY: Yeah, I do.
THALER: That may be a limited set because this has to be a girlfriend that wants to reciprocate this relationship. There’s a set of possible girlfriends, not all of whom you know. Economists have written down models about how you should search in a situation like this. You’ve had other girlfriends in the past, and either you or they have rejected you. The question of whether this is the right one depends on how likely it is you’d find somebody better. That’s the first thing an economist would do.
ROSALSKY: Right. There’s also other probabilities, right? Some day I want to get married. Someday I want to have kids. That upfront investment in her being my girlfriend … I have to have some knowledge of the probabilities [to know] that I’m making the right investment here.
THALER: Right. Presumably, if you decide that this is your girlfriend and behave responsibly, then you’re going to be missing out on all kinds of opportunities for searching for better alternatives. That will be another opportunity cost…
ROSALSKY: Right, single life.
THALER: … that homo economicus will be considering every day. Each day will be another decision about whether to stick with this girlfriend or resume searching. I recommend strongly not playing this particular part of the interview to this prospective girlfriend.
ROSALSKY: Yeah. I might have to do some finessing. Related question, actually: can homo economicus be romantic?
[MUSIC: Steven Senisi, “Rhodes Venture 16” (from Dreaming on Eyelid Screens)]
THALER: No, I don’t think so.
ROSALSKY: But, to be serious for a second, this girl is really great. She’s really terrific, and I have a big crush on her. But again, trying to live my life as homo economicus. Here’s my plan: I’m gonna create a spreadsheet and figure out the costs, benefits, and probabilities of this decision with her and then take the plunge. Does that sound like a good idea?
THALER: Well, it would sound like a good idea if you wanted to make a decision as homo economicus. Better include how much money she’s going to make.
ROSALSKY: This doesn’t sound very romantic, does it? But I really like this girl, so thinking like homo economicus, I thought about how I could maximize the chances that she’d become by girlfriend. That is, of course, in the case that my spreadsheet ended up saying she was an optimal choice. The date I picked was Valentine’s Day. The place: the most romantic spot in New York City I could think of.
Cary GRANT as Nickie Ferrantein in An Affair to Remember: How about the top of the Empire State Building?
Deborah KERR as Terry McKay in An Affair to Remember: Oh, yes, that’s perfect. It’s the nearest thing to heaven we have in New York.
VOICE: The Empire State Building’s observatories are New York City’s highest, and feature unobstructed 360 degree views.
VOICE: If you’d like to walk up, six flights, you can walk up this hallway here.
ROSALSKY: There’s nothing more romantic than walking up stairs.
INMAN: With a crowd of people. In the movie, they just pop right on up. There’s no lines. There’s no ticket. They just go up and they meet each other there.
ROSALSKY: We made it. We’re at the observation deck now. We’re inside. It is snowing outside right now. All right, let’s bundle up before we go out there.
INMAN: It’s snowing pretty hard. We can barely see past about 20 blocks or so.
ROSALSKY: What can you see right now?
INMAN: Let’s see. Oh, I see the Chrysler building.
[MUSIC: Paul Avgerinos, “I Do”]
ROSALSKY: Well, I guess this a good moment. Hey, Rachel.
INMAN: Hey, Greg.
ROSALSKY: I asked you to come up here on Valentine’s Day because I have a question to ask.
INMAN: All right.
ROSALSKY: But before I ask it, hold on one second …
INMAN: Is this an iPad for me?
ROSALSKY: No, actually. I just have to fill out this spreadsheet real quickly.
[MUSIC: Matthew Aguiluz, “Revolving Record Loop”]
ROSALSKY: All right, here we go. Before I ask the big question, I have a few smaller questions to ask, okay? As you know, I’ve been living my life as homo economicus. Before he’d make a decision like this, he would weigh out all the costs, benefits, and probabilities. If you think about it, this is really an investment. I just want to make sure we’re making the right decision here. Okay, here we go: what is the probability that you’ll want to get married within the next five years?
INMAN: Do I like say on a spectrum? Wow. Medium to high?
ROSALSKY: Okay, great. That’s good. Okay, here’s another question: what’s the probability that you want to have children within the next 10 years?
INMAN: Oh my God. The next 10 years? High.
ROSALSKY: Okay, great! That’s awesome. All right, just a few more little things. Also, there’s costs and benefits involved in this decision. I mean, we live about a half an hour away from each other on the train. That’s a pain in the butt, right?
INMAN: Yeah. That’s true.
ROSALSKY: Also, you’re a vegan, so that kind of…
INMAN: Whoa, whoa, whoa. Okay, yeah.
ROSALSKY: That limits our …
STRANGER: Happy Valentine’s Day!
ROSALSKY AND RACHEL: Happy Valentine’s Day.
ROSALSKY: That limits our restaurant options a little bit, you being a vegan.
INMAN: That could be a benefit to your health!
ROSALSKY: Okay, that’s true. But it does limit our options. But, you know what, you’re right. Maybe I’ll switch to being a vegan too. Then there’s the opportunity cost of us being single. But you know what, that’s overrated. But on the other hand, there’s just tremendous benefits as I see it. You’re so smart. You’re beautiful. You’re funny. I have such a great time with you. I’ve thought about it. I’ve weighed everything, and I’m wondering if you’d want to be my girlfriend?
INMAN: Yes. Aas long as you promise to never act like this again, okay?
ROSALSKY: Yeah, I can agree to that.
INMAN: All right.
[MUSIC: Kero One, “This Life Ain’t Mine” (from Early Believers)]
DUBNER: All right. Greg, it’s been a few months since you and Rachel officially became a couple up on the Empire State Building. How are things going on that front? Are you still together?
ROSALSKY: Believe it or not, Stephen, I’m happy to report: yes, we’re still together.
DUBNER: Awesome. Do you think that’s because of or despite the romantic spreadsheet you whipped out that night?
ROSALSKY: I’m really happy with the relationship, so I guess you could say I made the “’optimal’ decision. But I can’t really say if that’s because of the cost-benefit analysis I did with my spreadsheet, but maybe.
DUBNER: I’m curious: have you found that having a girlfriend has affected your pursuit to be more like homo economicus? I’m thinking about this in at least two directions: 1) you might see yourself now as half of a couple, with a different future trajectory than if you were purely single; and 2) there’s the opportunity cost angle. You aren’t having to spend a lot of time pursuing a girlfriend. How’s that working out, generally?
ROSALSKY: Stephen, to put in the economic terms, there are a lot of complementarities between me and Rachel. We like hanging out. We like doing things together, and I think we’re happier together than we would be apart. I think that’s even truer since Valentine’s Day.
DUBNER: Okay, Greg. I want you to tell us what we are going to hear from you in Act 2 as you continue to live your life a bit more like homo economicus?
ROSALSKY: If you haven’t already guessed, Stephen, this creature doesn’t quite fit in the world that we live in. A big part of that comes from what Thaler said at the top.
THALER: An econ has no emotions.
ROSALSKY: As you’ll hear from Thaler, this has some big downsides for society.
THALER: Humans are a lot nicer than econs.
ROSALSKY: But as a different economist tells me, there might be a real upside to going through life thinking like an econ, without all that emotion.
Bryan CAPLAN: He doesn’t have hate. He doesn’t have envy. Think about terrorism. In a world where everyone is homo economicus, who would the terrorists be?
* * *
[MUSIC: Igor Stravinsky, “Elegy for Solo Viola” (from L’oiseau de feu No2)]
Greg Rosalsky, a producer on this show, is trying to live his life more like homo economicus, the economist’s idealized version of the human being. So far he has gotten advice on how he could improve his morning commute. And he’s had some success on the finding-a-girlfriend front, although we don’t really know the counterfactual, whether he might have been just as successful, even more so, without the spreadsheet. Now it is time to think about how a guy like him, a would-be econ, fits more broadly into society, and what he can, and should be contributing to society. He starts small: with a musician playing in a subway station in Greenwich Village.
ROSALSKY: Excuse me.
MUSICIAN: Yes? Hi.
ROSALSKY: Can I ask you a question? How many people walk by and enjoy you playing the viola and do not give you money?
MUSICIAN: How many people give money? It’s definitely a small percentage of the people who walk by. There are probably thousands of people who walk by even in an hour. And yet, I also have made my living at it for months this way.
ROSALSKY: Let’s say I’m completely cynical, or I’m a sociopath. I just sit here, I listen to you play this beautiful music and I don’t pay. What do you think then?
MUSICIAN: I admit, I get annoyed if somebody sits directly in front of me, listens to multiple movement. I like give my like special best because they’re there and then they don’t pay anything. That will trigger my freeloader trigger. I don’t like that.
ROSALSKY: In economics, this is what is known as a public good, where I can get access to it without paying for it. There’s an incentive problem there. When people do give you money for something they don’t have to pay for, why do you think they do it?
MUSICIAN: Well, I like to think it’s out of love. But there are probably a lot of different reasons, including like pity, compassion, or guilt. I don’t know. I think there are a lot of reasons why people give. But I like to think the main reason is like inspiration.
ROSALSKY: What’s your name?
ROSALSKY: Allison, thank you so much.
ROSALSKY: Our world is filled with public goods; clean air, roads, the rule of law, fireworks, the list goes on and on. Public goods have a specific definition in economics. The most important part is that they are non-excludable. That is, public goods are really hard to exclude others from consuming. So in the case of Allison’s music, which was played in a public space, there was no real way to prevent me from listening to it. That’s nice because it means I can enjoy her music for free. But there’s a problem: if everybody thought that way, street musicians wouldn’t get any money, and a lot of them might decide to stop. This is known as the free-rider problem. And it’s why economists believe free markets cannot always provide public goods. I asked Professor Thaler about this.
ROSALSKY: Standard economic theory predicts that public goods will not be provided at the optimal level because of what’s called the free-rider problem: basically, many people will not contribute to something they can get for free. Is it safe to say that homo economicus is a free rider?
THALER: Yes, and proud of it. Econs think that it’s a fool’s game to contribute to charity or donate to public radio.
THALER: Right, because why should I donate because I can listen for free?
[MUSIC: K. Sparks, “Sunshine”]
ROSALSKY: The decision to give money to a street musician is similar to many other decisions. Should you clean up the common space of your shared apartment? Should you support the accuracy of Yelp by uploading reviews yourself? Should you give money to that charity that helps starving children? And when it comes to our government, should you contribute to the public good that is a well-functioning democracy by, say, voting?
ROSALSKY: We are in WNYC on election day, November 4th, 2014.
Suzie LECHTENBERG: You gonna vote today?
ROSALSKY: That’s our executive producer, Suzie Lechtenberg.
ROSALSKY: I’m not quite sure because I’m thinking about what homo economicus would do. I don’t think he would vote.
ROSALSKY: Hello, Professor Caplan?
ROSALSKY: I explained to Professor Caplan that I was attempting to live my life as homo economicus. The classic version of this creature is completely selfish. So I asked Caplan: if I were really the selfish homo economicus, would I vote or not?
CAPLAN: If you’re totally selfish, the odds that your vote is going to change the election is so slim that you simply would not bother to vote. Even if you are voting on your own execution, you’re more likely to die on the way to the polls than you are to get executed, so you might as well just take your chances. Sit it out and stay home.
ROSALSKY: But maybe there are some reasons why the super-selfish homo economicus would want to vote, like signaling to his friends and his colleagues. Say I want to get that nice “I Voted” sticker, put it on my shirt, then show all my friends and say, “Hey, look at me!”
CAPLAN: As long as they didn’t realize what was going on. If you’re all homo economicus, there would be very little point. But if you were trying to pass … I’m homo economicus, but all my friends will get very upset at me if I don’t vote. What do I do? I can either take two hours out of my life and vote, or I can go online and print out some stickers, which will take care of my voting requirements for the next 20 years. Every time there’s an election, I pull a sticker off the sheet, and my friends are none the wiser.
ROSALSKY: It was already election day — and I didn’t have access to counterfeit “I Voted” stickers, so that wasn’t really an option for me in character as homo economicus. Furthermore, I had a bunch of non-homo economicus friends and colleagues who did vote and who urged me to do so too. One of them was my friend Sean, who works at a desk near me. He immigrated to this country, and he actually put in the work to become a naturalized citizen. He cares about our democracy.
ROSALSKY: I explained my situation to Sean.
ROSALSKY: I saw that you have a little sticker on your sweatshirt, and I’m wondering why did you vote?
RAMESWARAM: I voted because I consider it a privilege to vote.
ROSALSKY: Why so? You’re from Canada. Are you guys not allowed to vote up there? Why is it a privilege?
RAMESWARAM: Canadians are allowed to vote. I moved to the United States when I was 16 years old. By the time I turned 18, and would have been a legal voter in Canada, I was no longer vested in Canadian politics. I became a naturalized citizen of the United States in 2011 at the age of 26. That was the first time I could really vote. That was the first time I voted. It’s always been a passion of mine, politics. I find politics to be a little disheartening, at times.
ROSALSKY: That’s a nice word.
RAMESWARAM: But to be so apathetic that I wouldn’t vote seems not to be the correct course of action. I don’t think it would be helping the situation.
ROSALSKY: What’s your advice for me?
RAMESWARAM: Can we get personal?
ROSALSKY: Yeah, let’s get personal.
RAMESWARAM: Okay, Greg. I know where you live. You live in Williamsburg, perhaps one of the hippest neighborhoods in Brooklyn. This morning, I went to our local polling station in Williamsburg and there were three people in there. It was really sad. We have become cliches: we are just non-voting, apathetic hipsters. Counter that narrative, Greg. Get out there and vote!
[MUSIC: Niklas Aman, “Spokes” (from Stirred Up)]
ROSALSKY: For the record: I am not a hipster. But maybe Sean had a point. If I was really homo economicus, maybe this peer pressure wouldn’t affect me much. But Sean’s words were enough to at least motivate me to go to my local polling station. After all, it was only one block from my apartment.
ROSALSKY: I’m now in Williamsburg, Brooklyn, outside of a polling station, trying to find a rational reason for me to go in there and vote, as homo economicus.
ROSALSKY: Hey, how’s it going? Can I talk to you guys for a second?
VOICE: Yeah, no problem.
ROSALSKY: Did you guys vote today?
ROSALSKY: Why didn’t you vote?
VOICE: Man, our vote doesn’t count anyways. I believe it don’t count, so I don’t vote.
ROSALSKY: Economists agree with you.
ROSALSKY: What’s in it for me? What’s in voting for me?
VOICE: You get a sticker.
ROSALSKY: That’s it, I guess. Right? Then you can show it off? If you’re really selfish, like me.
VOICE: You can show it to all your friends on Facebook. Instagram.
VOICES: A lot of likes.
ROSALSKY: A lot of likes.
ROSALSKY: I’m not sure how much Facebook or Instagram likes are worth, but it’s hard for me to believe democracy runs on them. Which brings up the question: how do economists who subscribe to this view of human behavior think democracy works? Caplan again:
CAPLAN: It’s a good question. In a way, you would have to ask them. But there is a standard answer, which is, “Once enough people drop out, the probability that you’ll change the outcome will finally get to be appreciable and then people will finally vote.” The prediction in a world of homo economicus is not that nobody would vote, but that voter turnout would get to be so low that it actually started to pay.
ROSALSKY: So basically in most circumstances, the neoclassical economic model says we shouldn’t vote. Of course, not everyone feels that way.
VOICE: As an American, you have a duty to vote.
ROSALSKY: That’s not enough to sway homo economicus.
VOICE: Why did I vote? Because each vote counts. As a citizen, it is our responsibility. Our community needs a lot of things, like better schools, better teachers.
ROSALSKY: I don’t have kids and I’m not sure I would raise them here, so if I were really selfish, I wouldn’t care about the quality of my community’s schools. And even if I weren’t in character as homo economicus, my one vote wouldn’t matter anyway.
VOICE: It’s not just a simple matter of vote and walk away. But we have to vote. They win, we make sure we hold them to it. One of the ways in which we do that is to join civic associations, block associations. Get together in groups.
ROSALSKY: So there’s power in organizing.
VOICE: There’s power in organizing this thing and that’s the only way we can get them to adhere to what they say. To do what they say they are going to do.
ROSALSKY: So we know that homo economicus wouldn’t vote in most circumstances. What about organize?
CAPLAN: The leader role is nice because you might be able to get a lot of attention for yourself and turn it into a successful career. The real question is would homo economicus ever really want to be a rank-and-file follower, and that’s a definite no.
[MUSIC: Def Manic, “Can’t Forget That”]
ROSALSKY: In 1965, economist Mancur Olson published an influential book called The Logic of Collective Action, which applied the homo economicus model to the political world. He argues that political action is a public good. Like the street music we heard before. That’s because people who don’t contribute to organized political causes can’t be excluded from their benefits. Just like we can’t be prevented from listening to music in a public space. Hence, there’s a huge free-rider problem for collective action. Now, back to homo economicus. He’s extremely selfish. He has no emotions. He does a cost-benefit analysis of everything. He’s the type of creature who, as Richard Thaler says, if he encountered one of those give-a-penny, take-a-penny trays at a convenience store…
THALER: They would take all the pennies.
ROSALSKY: If collective action is a public good, what does that mean?
CAPLAN: The answer is if everyone were homo economicus, then collective action would never happen.
ROSALSKY: You might be thinking: we live in a democracy. Large groups of people work together for the greater good all the time. The late Mancur Olson would disagree. Here he is explaining his theory to the U.S. Congress in 1995:
Mancur OLSON: Let’s think, first, of a lobbying organization that we might think of setting up just to serve the public interest. Or to serve the interest of consumers. Or taxpayers. Or the poor. Or any other large class. If we had such a lobbying organization, the benefits of it would go to a huge number of people whether or not they paid dues.
ROSALSKY: And because people cannot be excluded from the benefits, even if they don’t chip in, these incentives create a destructive free-rider problem.
OLSON: That means that we lack…organizations that lobby for the public interest in general; such as we have are tiny and relatively unimportant.
ROSALSKY: But Olson argued that smaller groups, like big corporations and unions could lobby effectively.
OLSON: The free-rider problem is less serious for them because one or two or three organizations get a large part of the benefit.
ROSALSKY: As a result, Olson believed he had the answer to why in a democracy special interest groups trump the public interest again and again. But what about those political causes that did actually benefit large groups of people? These stories fill history books: movements that ended slavery and apartheid, fought communism and fascism, preserved freedom, and won independence. How do people who believe we all act like homo economicus explain these big changes? Caplan again:
CAPLAN: That’s a great question. My late colleague Gordon Tullock had a paper called “The Paradox of Revolution.” He was as firm a believer in homo economicus as anyone I’ve ever met. He really had two stories. Story number one is that almost all the history you’ve heard is wrong and what are painted by historians as mass movements are mainly struggles between rival elites who then write the history books to claim that people were on their side. Then, Tullock’s other story is there’s also an entertainment element. Tullock was around during the student revolts of the sixties. He saw them with his own eyes. He said, “Look, these kids know it’s very unlikely that they’re actually going to get shot. There’s not going to be a lot of violence. So what are they doing? They’re having a little party. Or a big party. They’re dancing around, they’re cheering and they’re smoking some pot. If the police actually start doing what happens in scarier countries, they will run away like frightened rabbits, or would have.”
[MUSIC: K’naan, “If Rap Gets Jealous” (from The Dusty Foot Philosopher)]
ROSALSKY: Tullock’s theory shows how if you believe we’re all completely selfish, it’s possible to concoct explanations for the big changes we’ve seen in history. But there’s a problem with that theory: there is a mountain of evidence that says we’re not completely selfish. How could so many economists lose sight of that? Richard Thaler again:
THALER: How Mr. Econ came to dominate the profession — it was not always that way. Adam Smith was a behavioral economist. Economists up until World War II had no trouble realizing that they were trying to talk about real people.
ROSALSKY: Charity, volunteering, public service, street music. Real people contribute to things all the time for nothing having to do with financial or social gain. That’s what a huge volume of research tells us.
THALER: What we know is, thankfully, some people do contribute.The real world is a mixture. There are free riders and there are cooperators.
ROSALSKY: If the extreme version of the homo economicus model were the truth, we would all be free riders. Everything that requires an ounce of compassion or pity or love would shrivel up and die. We would all follow the logic: why should I give to something when I can get it for free?
THALER: The great economist and philosopher Amartya Sen wrote an article describing people who think like that as rational fools. Because they know the theory but they’re fools because they should realize that if everyone in society behaved that way, the world would not be a very happy place.
ROSALSKY: So there are huge downsides to living on planet homo economicus. But Caplan points to the potential upsides:
CAPLAN: People often focus on the good emotions that homo economicus doesn’t have, so he doesn’t have love and compassion and that kind of thing. But they tend to forget the other things he doesn’t have. He doesn’t have hate. He doesn’t have envy. Think about terrorism. In a world where everyone was homo economicus, who would the terrorists be? Who are going to be the people who say, “I’m going go kill myself”? What? I’m not going to kill myself. How am I going to enjoy the world that our terrorism is going to create for us if I’m dead? I’m not doing it. Think about what war would be like if every guy on every side is like, “I’m only going to do this if there’s a very tiny risk.” Homo economicus could end terrorism, give us world peace.
[MUSIC: Niklas Aman, “Above the Clouds” (from Above the Clouds)]
ROSALSKY: For better, or for worse, we don’t live in a world of homo economicus. We live in a world of homo sapiens. Where some people contribute to public goods. Some to public bads. And some people do nothing. Some are free riders. And others cooperators.
THALER: And neither extreme model is a good description of the way people actually behave.
ROSALSKY: Professor Richard Thaler has spent his career urging his fellow economists to recognize just that: how people actually behave. And if economics is supposed to be a science, not a dogma, its models must take that into account. The neoclassical model that we poked fun of on this program is still taught in economics 101. But rational choice models have undergone major revisions in recent decades. Behavioral economists have played a big part in that. For example, in what could be called homo economicus 2.0, many economists have dropped the classic assumption that everyone is completely selfish.
THALER: Most economists would agree that the second one is closer to the truth. But it depends on where you want to draw the line. No economist would deny that people behave altruistically toward their family members and close friends. You can make an argument about reciprocity, that this is all rational. But it’s clear that people show more other-regarding behavior than even that expansive definition would suggest. The phrase that I like to use for this is people are “conditional cooperators.” You don’t want to be the only one that puts some money into the guitar case for the street musician. But if other people are, then they will too. That’s why any smart street musician starts by putting some money in the case before they start playing.
ROSALSKY: And just as some people are “conditional cooperators” when they give money to a street musician, conditional cooperation can explain why many people volunteer for causes for the greater good, or depending on your perspective and place, the greater bad. As for homo economicus 2.0, according to Caplan, this non-selfish version can explain why we would rationally vote in some cases:
CAPLAN: Homo economicus 2.0 might vote if the stars align. What do you need to have the stars align? You need the candidates to be actually really different from each other. Homo economicus has to figure out which one is actually better. A whole lot of people have to be affected. The election has to be close. Put that all together and homo economicus probably would vote.
[MUSIC: Ruby Velle & The Soulphonics, “It’s About Time” (from It’s About Time)]
ROSALSKY: So homo economicus 2.0 is an improvement, bringing us closer to explaining how the real world works. And that’s important because economic models help us think through problems and come up with solutions. But even homo economicus 2.0 is galaxies away from homo sapien. In fact, Thaler still thinks of him like a half-alien from the planet Vulcan.
Leonard NIMOY as Spock in a clip from Star Trek: Logical. Flawlessly logical.
THALER: He was an econ and, if you remember, he found humans quite amusing.
William SHATNER as Captain James Kirk in a clip from Star Trek: You’d make a splendid computer, Mr. Spock.
NIMOY as Spock in a clip from Star Trek: That is very kind of you, Captain.
ROSALSKY: Homo economicus is not human because he doesn’t have a brain. He has a utility function — a simple formula for obtaining his needs and wants. And this utility function comes complete with superpowers like constrained optimization, a power that makes him ridiculously good at making himself the happiest he can be. Why would economists cling to assumptions like this? Thaler thinks it comes down to how hard the math becomes without it.
THALER: Neoclassical economics and the concept of homo economicus has evolved in part because of the limited rationality of economists. By that I mean constrained optimization problems are the easiest ones to solve. Trying to solve problems where people behave differently depending on what mood they’re in, and if the probabilities they assign to various outcomes aren’t the correct ones. It’s very hard to do in a mathematical way. Now, we’re making a lot of progress on that.
[MUSIC: Eleggua Productions, “Diosa”]
ROSALSKY: Once a voice in the wilderness, Thaler is now the president of the American Economic Association, the main professional organization for U.S. economists.
THALER: As for the profession, I’m pretty optimistic. The younger crowd seems open-minded.
ROSALSKY: Thaler says those becoming economists, at least at the graduate-school level, are being taught ideas from behavioral economics. And that behavioral insights are becoming more widely accepted by his profession.
THALER: The most cantankerous objectors are the ones closer to my age.
ROSALSKY: And whether or not it’s rational for him to be, Thaler is optimistic about the future.
THALER: I hope that 50 years from now, maybe sooner, the field of behavioral economics will no longer exist, and economics will just be as behavioral as it needs to be.
That was Greg Rosalsky, a producer here at Freakonomics Radio. Next week on the show: there are certain crimes for which the criminal pays — and pays and pays.
Rick MAY: I’m guessing the first year that an individual is charged and convicted they’re gonna be easily in the $10,000 range.
Why is it so costly to be a sex offender? That’s next time, on Freakonomics Radio.