Should We Really Behave Like Economists Say We Do? A New Freakonomics Radio Podcast

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Our latest Freakonomics Radio episode is called “Should We Really Behave Like Economists Say We Do?” (You can subscribe to the podcast at iTunes or elsewhere, get the RSS feed, or listen via the media player above. You can also read the transcript, which includes credits for the music you’ll hear in the episode.)

You have perhaps come across the phrase homo economicus, which describes a model for human behavior as seen through the lens of economics. In this episode, you’ll hear Freakonomics Radio producer Greg Rosalsky embark on a long and tortuous process to live his life like homo economicus. Is this even possible? If so, is it desirable? Even if it’s better for an individual, is it good for society?

In his quest, Rosalsky is guided by the wise and charming Richard Thaler, the University of Chicago economist who has dragged the homo economicus model into the modern era, helping to pioneer the field of behavioral economics. If you spend any time at all in Freakonomics land, you know how much we admire Thaler. He is the co-author (with Cass Sunstein) of the landmark 2008 book Nudge; and Thaler has just published a wonderful new book called Misbehaving: The Making of Behavioral Economics(The fact that you are reading these words on this site means you will almost certainly enjoy Misbehaving; you should go buy it immediately.)

In the podcast, Thaler counsels Rosalsky on how to get a seat on the subway, how to play the dating market, and whether to pay for public goods like free music in the subway. Rosalsky also ponders whether voting is a rational act, receiving advice in this realm from Bryan Caplan, author of The Myth of the Rational Voter (whom you heard from in our “We the Sheeple” episode as well as in “The Economist’s Guide To Parenting“). Rosalsky also draws on the economic wisdom of Katherine Milkman, Mancur Olson, and Gordon Tullock.

I am most curious to hear what you think of Greg Rosalsky’s journey of self-discovery — and whether it made you more, or perhaps less, likely to embrace the bedrock truisms of economics. In any event, he did a fantastic job with this episode and I am sure you love it.


Kressel

So are animals the true econs? They're hard-wired to satisfy their own needs first and foremost.

A.J.

I suppose the animals would have to barter and specialize to make that true.

Tom Rostek

I am listening to “homo economicus” story this afternoon. I encountered the economic decision about voting just last month. For our local primary election, there are only 400 voters per political party in each ward. There was only 10% turnout. Me and my wife made up 5% of all voters from our political party.

This made me realize that voting in the presidential election is a waste of time. However, voting seems to be quite powerful in these small local elections!

I think people should blow off the big elections and only vote in the low turnout ones!

SD

I'm shocked that the phrase "evolution" wasn't uttered even once. The entire reason there is a delta between actual human beings and "homo-economicus" is because our current environment is evolutionarily novel. Altruistic behavior makes much more rational/economic sense in tight groups we were living in hundreds of thousands of years ago (during evolutionary times) because of the chance that the benefactor of the altruistic behavior would a. be genetically related and b. have a high chance of reciprocating the behavior. This is the same exact reason why humans irrationally display reputation-saving behavior. Reputation is much more sticky in a group of 200 than a group of 2,000,000.

Humans as a whole are wired to maximize reproductive fitness in the ancestral environment. That's literally all there is to it. Once you understand that, you understand everything brought up in this podcast.

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Greg Rosalsky

I originally ended the podcast on a discussion about evolution. I cited Robin Dunbar from Oxford who has interesting thoughts on this (he believes human beings' brains and language itself, evolved in large part to deal with the free-rider problem). Ultimately, however, it made the piece too long and took the focus off the themes of the piece.

I tried to allude to the evolution stuff with my line "homo economicus doesn't have a brain, he has a utility function." For me, that sort of sums it all up. But you make valid points. Just didn't have space for it (this thing was already long!)

SD

The voting point topic is always an interesting one as well. Voting in nationwide, state-wide, hell, even city wide, elections is completely irrational (ignoring the signaling and social/reputational aspects). Yet *teaching others this fact* could potentially cause one to incur negative repercussions. If you assume that your listeners/readers/friends have similar political views as you on a net basis (a fairly logical assumption), and you can convince them about the irrationality of voting, and they convince their friends, who convince their friends, etc, etc, it could *possibly* have a measurable effect via some sort of cascading mechanism.

Then there's the whole other paradox of education/intelligence being positively correlated with voting behavior, even though it is not a rational choice. You could try and counter by saying its largely signaling - but if more intelligent people were more likely to understand that voting was irrational then all it should do is to signal lack of intelligence. One answer could be that its just *so* counterintuitive that only a miniscule proportion of the population truly understands the irrationality of voting (with that segment of the population wanting to signal social behavior to groups that are more largely comprised of those that don't understand). Another argument could be that decision making (democracy) in such large groups is evolutionary novel and that thus our brains vastly overestimate our potential impact.

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Andres

Interesting. But I have to say it looks like you have a straw man and of course it is easy to take such a man down.

I have never met an economist that think that Humans are Vulcans (I work with a lot of economists!). By definition, theories simplify the real world. Are the conclusions that the standard model generally correct? Well they are...people really don't vote in unimportant elections or give money to street musicians. And prices go up when things are in great demand. The ideas of behavioral economics have long been in economics; when I studied economics in the early 1990s, we learned lots of reasons why people might give away money or participate in social groups. I think also if you live in a pretty poor environment, you are forced to be much more calculating. The rich, like us, have a lot more flexibility.

Honestly, I think I would have invited somebody willing to criticize Thaler and his approach.

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BZ

You're onto something here. I would venture to say that the "Vulcan" interpretation of the economic view of man is a *recent innovation* that is typically dragged out ONLY to trash the thought paradigm as a whole. I said all this below, but to sum up: when the 19th century economic ideas of marginal utility and subjective valuation are considered, there is NO Vulcan.

Jeffrey

So if everyone is going to be a free rider there is no public goods, except if I want a good that just so happens to be a public good (I like public radio for example) isn't the fact that everyone else is enjoying it for free (or not in the case of some public radio) just a sunk cost. And shouldn't homoeconomicus ignore it because he doesn't suffer from the sunk cost failicy?

BZ

This podcast lost me. Why isn't marginal utility and subjective value as much a part of "homo economicus" as all the other things? Are those concepts not already ~120 years old in economic thought? E.G. Saving more money is economically rational for a robot, but if I have stronger positive time preference, then it is MORE rational for me to NOT save (or at least not save as much). The solution to this contradiction is to drop the robot -- poof, problem solved.

But that would be my whole point: the poof happened in the 19th century, and as far as I know, it hasn't been dropped from orthodox economic thought, except when someone wants to grind an axe against the whole school of thought as a whole, in which case it is conveniently forgotten.

Pierre Dragicevic

Great episode, as often! Although I feel that more effort could have been put into distinguishing between selfishness and rationality.

I don't see how the decision not to vote has anything to do with selfishness. A rational altruist won't vote either, and would use that free time to do something more productive and beneficial to others. At the same time, it is not absurd to assume that selfish motives drive the choice of voters. I was a bit annoyed that the episode repeatedly and misleadingly conflated non-voting with selfishness, an error that's already way too common in the general public.

Greg Rosalsky

Thanks, Pierre.

It's a solid point. That's what I was trying to get at with "homo economicus 2.0." That was my way of trying to communicate that the utility function has changed. Selfishness is all about the utility function. Modern economists, at least most or many, say anything can enter the utility function; it's a matter of personal preferences.

Rationality is really about acting in a way consistent to optimally achieve your preferences. Homo economicus 2.0 has a broader utility function but still does constrained optimization (meaning he optimally achieves his objective/preferences).

I asked Thaler about his definition of "rationality" and he said he doesn't like to get into the debate about what's "rational" and what's not rational. With broader utility functions, you can say anything is rational. Why did you do X? Well, because it gave you utility. He said this makes the theory say less; it becomes tautological.

So I decided to not explore that too much because it would be too confusing/time consuming to explain. Instead, I opted for "homo economicus 2.0."

All the best

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A.J.

There are selfish reasons to be a good person as well. It was kind of touched on in the subway seat experiment. Giving up your seat for an older /pregnant/disabled person does make you feel good, especially in a conspicuous manner. "Look at me being a good person and I'm totally going to tell my friends about how good of a person I am later." It would take a large amount of money to overcome that feeling.

SD

Yeah but the puzzle is *why* does it make you feel good? And conversely, why would you feel immense guilt taking a seat from an elderly person?

Well, it's not a puzzle if you understand basic evolutionary theory, but that's what they were getting at in the podcast anyway.

Quentin Holness

As a person who studied Economics I found this episode to be really interesting.
I've had clashing ideas w/ some Economic ideas that were more traditional and non-behavioral oriented, so much so that I had an issue with the valuation of human life in a public sector model (that moment felt awkwardly philosophical).

That said, I am commenting because I am interested in the region of computational social sciences.
As the role of the Data Scientist grows I think being able to compute optimization models w/ improved technology and accuracy offers a great opportunity for econ studies... And that said, it still relies on the assumption that human will behave in a binary fashion (unless your neural net is absurdly dense).

Anyway, great show!

Dating an Economist has it costs and benefits, haha!

michael

I am homo economicus!

I recently had an Econ major come to my door and as for a donation for PBS. Since it was a nice night out, I decided to grab the kid a drink and ask him if he saw any contradictions of what he was doing.

I told him that my 3 year old LOVES Curious George, Cat in the Hat, and other fine programming I can see for free on PBS. With the PBS App, I also no longer need to buy any DVD's as the content streams. I told him that we are free riders, proud of it, and if PBS died, i would find the next free thing.

After busting his chops and pleas for the better of society, I wished him the best and closed the door, then curled up on the couch with my daughter, popped some popcorn, and had a PBS marathon.

Great Podcast - ive re-ignited my passion to always act rationally, and convince everyone else they are nuts!

James

I think the real problem with homo economicus, or at least the view of him* presented here, is twofold. First, it doesn't give enough weight to the value of pleasure, or to the fact that individual find pleasure in different things. Some people might be willing to pay upwards of $10K for Superbowl tickets (per http://fortune.com/2015/01/31/super-bowl-ticket-price-chart/ ), while I'd pay at least a moderate amount to be let out, if I accidently wandered in. (With apologies to Legolas :-))

Second and larger problem is that h. economicus seems to be the ultimate short-term thinker. He is unwilling to invest in creating & maintaining long-term relationships, or to consider that small investments today can pay off in the future.

*And why is there not femina economica? (If I haven't entirely forgotten my high school Latin.)

John

Excellent podcast. Thank you for this.

Just some feedback that may be of interest. I regularly find myself thinking more and more like homo economicus, especially as i near my retirement years. Don't have time to worry about what's socially acceptable when I've an unemployed old man to feed and house and provide medical care for in the very near future.

So I do know how "econs" think. Been thinking more and more like one for the better part of 40 yrs.

I think homo economicus can very easily partake in voting, donate to public goods, and provide charity with no heartburn. It can be done when one factors time horizon and leveraging other people's time into the mix.

Goal: Maximize benefit with the least amount of exertion.

Not the goal: Save every penny.

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Example 1 - voting: I want to influence my local gov't activity. Lobbying, campaigning, walking door-to-door, whew! That's a lot of effort.

So I vote. And then I post about my voting on social media. Those I'm friends with share my political affinities, and I'm a believer in "monkey see, monkey do".

By posting about voting and commenting favourably on friends' posts that have voted, I'm maximizing my potential of influence with minimal effort.

Does my single vote count? Doesn't matter. What matters is whether or not my advertising of the vote influences others who think like me to follow suit. It helps too if I provide my "location" in any given post, so others can see a specific example and can start thinking about where they will vote.

Goal: Leverage other's time to bring about the desired action.

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Example 2 - public goods: I see a busker who is clean, provides good music in the public space, and seems to be reasonably well-mannered. I will always toss in a few bucks if spare cash is in my pocket.

Is this financially sound? Could my couple of bucks go towards a utility bill or towards a retirement fund?

Not really a concern. The important part is my econ happiness. Money kept in my pocket today does not always mean a long-term happiness achevement.

My time horizon for this investment is large. It's a long-term goal of helping to ensure my community is safe and has desirable elements in it. By providing income to the busker I'm helping to ensure he or she stays right where they are, attracting folks who find this entertainment favourable. It's likely the others who enjoy the music will also spend money in shops nearby and add wealth to the area.

Goal: Ensure my local environment will maintain value over a long time horizon.

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Example 3 - charity: I never give cash to folks on the streets but do donate to charitable organisations.

The reason for not giving cash on the streets is a no-brainer. It's the flip side to my point above.

But why donate to charities?

Folks need help. That's a given. They'll seek help one way or another.

So if I'm not giving cash on the street, how will folks get help?

Well, by gov't or by private organisations.

I can't afford to have the gov't forcibly take my income in the form of taxes to provide charity, so I'll encourage the private organisations to take the work on my providing income for them. And then I vote against the gov't spending and use social media to advertise that (see example #1).

Goal: Ensure my local environment will maintain value over a long time horizon, AND Leverage other's time to bring about the desired action.

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Julien Couvreur

Luckily there is more than one school of economics. You mention Adam Smith in the podcast, as well as neoclassicals.
There's also the so-called Austrian school, which are more like Adam Smith and classical economists in the sense that they are realists: they avoid making unrealistic simplifying assumptions for the purpose of mathematics.

First, they don't assume that all individuals have similar preferences (neoclassicals would say utility functions) or that the subjective benefits can be compared across individuals (interpersonal utility comparison or social welfare functions).
Second, they don't assume specific preferences from people, and instead treat people's observed choices as their demonstrated preferences (if a person gives to charity, that choice was at the top of the person's ranking, it is their preferred option). It is perfectly consistent with giving to charity, tipping the violin player, or realizing you made an error.

Overall, this view of realistic and subjective rationality may seem tautological (every action demonstrates what the individual felt is better, given the person's knowledge, feelings, experience, values, etc), but by avoiding unrealistic assumptions (such as homo economicus), the results can be stronger (higher confidence and range of applicability).

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Jeff

Interesting episode. I find there is something missing with the interpretation of the homo economicus model discussed in the episode.
First, the utility function of homo economicus should be long term in nature. All the discussions were short term. Many of the arguments about voting and public goods are based on a short term utility function and not taking into account the impact of homo economicus decisions on others. I'll attempt to use the voting question, though this may be an imperfect (example). Homo economicus would know that voting in one election may be pointless... if only looking at that election. But, being rational, he would look at the long term. If s/he doesn't vote and wiats until turnout is low... at that point, the institution will be in mush worse shape and will take more effort to get back to a steady state. It is more efficient to spend a little time now to maintain the voter turn out, including setting an example for others, than it would be to wait, let things get worse, and then try to turn it around. Homo economicus should be rational enough to look at the long term and understand his impact on others (whether s/he in fact has any emotions or not).
It seems to me that homo economicus would also be well versed in system dynamics, and would weight both short and long terms in his utility function.

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