Love it or hate it

Behavioral economics gets a lot of heat and a lot of praise. For economists it is hard to grapple with the reality that human beings are not as rational as we would like to think. There are many reasons for this, but it is important to keep in mind that we are biologically contrived, meaning that we carry along many weird and unforeseen glitches.

We, as people, are affected by these historical developments, for better or worse. The mind is easily tricked. Dan Ariely writes about an experiment at MIT where students were asked to write the last two digits of their Social Security numbers down next to items and see if this action affected their willingness to pay for items. It did, in some cases up to 350% between the bottom and top quintiles. Eek. A quote:

“Social Security numbers were the anchor in this experiment only because we requested them. We could just as well have asked for the current temperature, or your shoe size. Any question, in fact, would have created the anchor. Does that seem rational? Of course not. But when we make one decision, even when it’s about an arbitrary number, we bring this history into our future decisions, and continue to make the same decisions over and over without going back and questioning their wisdom.”

Ah the beauty of heuristics!