Summary
Humans have limited time and brainpower. As a result, they use simple rules of thumb—heuristics—to help them make judgments. From a traditional economic perspective, in which people behave and think correctly all the time, we are actually misbehaving.
Book Notes
In the world of Econs (traditional economists) people behave and think correctly all the time. Then how do you explain the following behaviors?
- Jeffrey and I somehow get two free tickets to a professional basketball game in Buffalo, normally an hour and a half drive from where we live in Rochester. The day of the game there is a big snowstorm. We decide not to go, but Jeffrey remarks that, had we bought the (expensive) tickets, we would have braved the blizzard and attempted to drive to the game.
- Stanley mows his lawn every weekend and it gives him terrible hay fever. I ask Stan why he doesn’t hire a kid to mow his lawn. Stan says he doesn’t want to pay the $10. I ask Stan whether he would mow his neighbor’s lawn for $20 and Stan says no, of course not.
- Linnea is shopping for a clock radio. She finds a model she likes at what her research has suggested is a good price, $45. As she is about to buy it, the clerk at the store mentions that the same radio is on sale for $35 at new branch of the store, ten minutes away, that is holding a grand opening sale. Does she drive to the other store to make the purchase? On a separate shopping trip, Linnea is shopping for a television set and finds one at the good price of $495. Again the clerk informs her that the same model is on sale at another store ten minutes away for $485. Same question . . . but likely different answer.
- Lee’s wife gives him an expensive cashmere sweater for Christmas. He had seen the sweater in the store and decided that it was too big of an indulgence to feel good about buying it. He is nevertheless delighted with the gift. Lee and his wife pool all their financial assets; neither has any separate source of money.
- Some friends come over for dinner. We are having drinks and waiting for something roasting in the oven to be finished so we can sit down to eat. I bring out a large bowl of cashew nuts for us to nibble on. We eat half the bowl in five minutes, and our appetite is in danger. I remove the bowl and hide it in the kitchen. Everyone is happy.
Each example illustrates a behavior that is inconsistent with economic theory.
→ Jeffrey is ignoring the economists’ dictum to “ignore sunk costs,” meaning money that has already been spent. The price we paid for the tickets should not affect our choice about whether to go to the game.
→ Stanley is violating the precept that buying and selling prices should be about the same.
→ If Linnea spends ten minutes to save $10 on a small purchase but not a large one, she is not valuing time consistently.
→ Lee feels better about spending family resources on an expensive sweater if his wife made the decision, though the sweater was no cheaper. And removing the cashews takes away the option to eat some more; to Econs, more choices are always preferred to fewer.
