Should We Really Behave Like Economists Say We Do? (Ep. 207)

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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.


Andy

Hi Greg:

Sorry to come late to this discussion. I'm a long time fan of Freakonomics. I've been researching/working on a art project around pricing and wanted to ask "homo economicus" if price is significant component in taste of wine, what wine would you buy?

http://freakonomics.com/2010/12/16/freakonomics-radio-do-more-expensive-wines-taste-better/

Or, I guess the question might be... is part of being "homo economicus" the ability to divorce the experience of drinking wine from the price and other marketing?

Andy

David Cantrell

Enjoyed the show very much, but your guest's comments about terrorism were dead wrong. He presented it as being irrational suicide, but suicide terrorism has only recently become fashionable. The IRA in the late 20th century, for example, were not suicidal, and going a little bit further back in time non-suicidal terrorism won Irish independence. Even those terrorists who were apprehended were rarely executed.

Chris Chaffee

Greg was great. Can't wait to hear him host again!

Scott Ballay

Great show, in the beginning of the podcast you used the example placing a value on the seat on a train. You began by saying you were not able to sit and therefore unable to relax an enjoy your cup of coffee and read the morning news. What does it say about me that the first thing that came to my mind was to get up earlier and do those thing prior to getting on the train in the first place. This would essentially lower the value of that seat based on your example. Does that make me "hyper rational".

Matt

Honestly, I thought this podcast kind of missed the mark. The host assumes that homo economicus is optimizing for money, but actually an 'econ' is optimizing for personal utility and subconsciously the passing on of their DNA. This simple distinction can make a huge difference in determining whether individuals are behaving 'rationally'.

For example, I doubt that anyone would argue that attending a sporting event is not utility-maximizing for some individuals. However, no one individual in attendance can expect to change the outcome of a game, no matter how loud they cheer, nor how hard they attempt to disrupt the other team's players. Even if they were able to change the outcome, the results of the game, or the team's win-loss record has no real effect on their personal life. I would argue that politics and voting is similar: it gives an individual the chance to feel part of something larger than themselves, participate in a group setting, and meet other like-minded individuals.

Another example is if you assume that an 'econ' gains non-zero utility from the utility gains of others. For example, donating, adopting a pet, or love may be rational if the utility loss from personal wealth reductions are counterbalanced by the utility gains of those you donate to. A biological rationale for this phenomenon could be the theory of 'kin selection'. This would imply that helping out a sibling who shares 50% of your DNA at little cost to yourself is a successful reproductive strategy. A deep-dive into the 'gay uncle hypothesis' could have been a great add on to this section.

Other topics that may have been interesting to discuss in this podcast include hyperbolic discounting, Daniel Kahneman's "system 1 & 2", search costs or mental constraints, signaling theory, and reproductive strategies. Finally, I think that including a contrarian viewpoint would have been valuable, as well as discussing the fact that rational behavior is often viewed as a starting assumption in economic thought, not the conclusion.

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Peachy

After listening to this podcast I've decided that I may not be ECON 1.0 or even ECON 2.0 but I am probably a 3.0 version or something close. I keep spreadsheets that get updated daily to tell me every expense, my current net worth, almost everything. I calculate the cost of my commute to the tenth of a penny to try and figure out if moving closer to work makes sense economically. Frankly, the way I see it, everyone else is crazy and living these expensive, overpriced lives.

Everyone driving around in fancy cars that have been financed on credit filled with their many expensive belongings and equally expensive children. Everyone with their crazy huge houses where the costs of interest, taxes, insurance, upkeep, and utilities, vastly out cost the price of a small studio. They're nuts! I mean why would anyone want to give their money away for luxury when, if you just did a better job holding on to it, you could achieve the ultimate luxury of an early retirement (think 40's not 60's).

The way I look at it is that everyone else is nuts, and I'm the one with the level head.

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Dave W

I was a little disappointed when Thaler suggested cheating to gain the desired seat. Would Homo economics really engage in cheating?

Casey Stewart

I feel like one thing consistently missed when discussing public goods and Homo e. is that he is always a free loader. That however is NOT necessarily rational decision making. Homo e. I believe will donate the minimum required to keep a public good operating. So in the case of the street music, he may not donate on the correct assumption that his fellow humans being irrational will donate enough. But in certain situations, with say a irreplaceable public good (to homo e.) that has a limited # of potential donators, homo e. will try to guess what his fellow users will donate. If that is enough to keep the public good operating, then he is back to "no donation" being optimal. If however his math comes up with "I must donate X or lose a public good that I value higher than X" he then donates X. Maybe I missed something, or I am completely wrong on this, but that is how I see it working.