Bookstores and Behavioral Economics!

So I was hanging out in the Park Slope Barnes and Noble all day on Wednesday, thanks to a hilarious “Reach out and Read” fund raiser which I could pawn off as work. ROR is a literacy program based around giving out books and reading to children in hospitals and doctor’s office waiting rooms– community outreach for anything to do with health care should count as work, since I’m a Sunset Park Community HealthCorps member. Anyway, what’s hilarious about it is that we all got dressed up as books and wandered around outside giving out book vouchers in the bitter cold, to promote family literacy. The Community Programs director at B&N, who bore the ridiculous name of Peaches, shoo-ed us away from fund raising in the store or directly outside of it. (When one of our crew went in to B&N without removing her book costume, I was forced to admonish, “Wait dude! Take off your book! Peaches is going to get pissed off!”) In the afternoon there were a couple ear-splitting performances by the Harbor Hill Senior Center Chinese Choir; Believe me, there is nothing quite as amusing as 20 enthusiastic eighty year olds bleating Chinese songs in a key so improbable that dogs will come running.

While taking a break from all the RORing, I picked up a book by behavioral economist Dan Ariely entitled, “Predictably Irrational: The Hidden Forces that Shape our Decisions”. Why would a book like that warrant any level of excitement? Because it’s perfect fodder for blogging my debate with Bill!

The topic of the debate is this:How do people make choices?

The common sense idea that people decide things based primarily upon their preferences is the cornerstone of free-market economic theory, my understanding of which goes *a little something* like this:

In an effort to become better off, people constantly make choices concerning what to buy from and sell to others. The collective sum of these choices is known as the market. Given that possible choices are many, resources are scarce, and people are unencumbered in their choices, the market tend towards an equilibrium based on mutual satisfaction.

The mechanism which guides this tendency is called price. Price has very powerful and predictable effects on the choices of both producer and consumer: The Law of Supply states that the higher the price of a good or product, the more the producer will supply. Meanwhile, the Law of Demand says that the higher the price of said good or product, the less the consumer will demand. This is known as the Supply and Demand model. The result in this model is that markets tend towards equilibrium prices, a point such that both consumers and producers are satisfied.

Of course this only holds true in a situation of “perfect competition,” in which producers compete against each other and consumers have many possible choices.

Because firms are competing with each other to make production cheaper and more efficient, an unfettered, perfectly competitive market encourages creativity and innovation. It also elevates quality of life for the consumer, who is always provided with goods of competitive quality at a competitive price. Indeed, since the free market stimulates the growth of industry and the economy in general, which is good for everybody, the role of government should be simply to allow the market to thrive.

Shout outz to Prof. Richie Adelstein for your Econ 101 class, as well as to Bill and to the anonymous authors of Wikipedia for filling in the gaps in my memory.

OK!

So Ariely challenges this model by saying that what consumers are willing to pay can be easily manipulated; consumers don’t necessarily have a good handle on their own preferences when it comes to making decisions. This is because human decision-making behavior is often influenced by hidden forces. Now, sociology/anthropology types might think that when Ariely mentions invisible factors that cause you to make decisions contrary to your preferences, he’s referring to the myriad pressures arising from social structures like class, race, gender, etc. BUT NO! He’s talking straight up psychology.

Like the goslings in Konrad Lorenz’s famous work on imprinting, humans are suggestible. We are susceptible to all kinds of cues. Not only that! We are creatures of habit. So once we’ve accepted an idea, no matter how arbitrary, we’re inclined to believe it and base decisions upon it, like the baby goslings who accepted Lorenz as their mother and subsequently followed him around everywhere. We have a desire for coherence, even if it’s not based on anything rational; Ariely calls this “arbitrary coherence”.

Ariely provides a wide variety of examples of human behavior subject to arbitrary coherence, all of which are based on his own research. There’s one experiment in which students are asked to write down the first two digits of their social security number, then asked to give an appropriate price for a set selection of products. There was a strong correlation such that the kids who had the higher numbers as “anchors” put down higher prices; lower SSN’s went for lower prices. So choices are often affected by random initial anchors, rather than pleasure according to preference.

Because of this arbitrary coherence behavior, people are very susceptible to advertising. They also will adapt to higher prices in a way that the Law of Demand wouldn’t predict, as in the classic case of Starbucks– coffee goes from $1.00 a cup to $4.00 but people are OK with it because of plush couches, fancy french presses, and “hip” music. The point is that, according to Ariely, market prices readily influence the consumers willingness to pay rather than vice versa.

Free-market economic theory is based on the idea that we are in touch with our preferences such that we can estimate the amount of pleasure a trade will give us vs. its price. If we can’t accurately compute these pleasure values, then it is not clear that having the opportunity to trade is going to make us better off. Policies should take the fact that human behavior is irrational into account!

(Eventually I’ll continue to blog on this train of thought and critique capitalism for a variety of other reasons, including the following: corporate dominance, ignoring biodiversity, and encouraging so-called one-dimensional thinking.)

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2 Responses to “Bookstores and Behavioral Economics!”

  1. William Bruntrager Says:

    Behavior Economics seems interesting, unfortunately I know next to nothing about it. But, since we’re talking about Predictably Irrational, you might be interested in the following posts and interview with Dan Ariely:

    Misbehavioral Economics
    More Misbehavioral Economics
    Interview, Wilkinson and Ariely

    I will definitely be responding to the implications of Behavioral Economics as soon as I stop being lazy.

  2. Nina Says:

    Yo dude — I welcome more critiques of neo-liberal economics!!!

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