The Irrational Consumer: Why Economics Is Dead Wrong About How We Make Choices

Trade is a contest, with a chance of coming out on the short end. Animals in "fight or flee" situations often find it safer to flee. Similarly, people in situations where trade is possible, or even promising, may find it safer to turn away. It takes trust to trade. McDonald's is successful because it has created a brand people trust - they know what to expect. A "30-day free trial" or "satisfaction or your money back" or "bring us a better price and we will refund the difference" are offers by merchants intended to promote the idea that they can be trusted, and that the risk of an unsatisfactory trade is low.

Real estate agents take advantage of people's discomfort with decision-making. Since buying a house is highly consequential and difficult to reverse, rational people should look at a great many options and think them through very carefully. A good agent will show you a few houses that are expensive and not very nice, and then one at almost the same price and far nicer. Many buyers will respond by stopping their search and jumping on this bargain. Our susceptibility to "bargains" is one of the cognitive devices we use to simplify choice situations, and one that companies are conscious of when they position their products.

One of the observations that most struck me was "economic choices can make us uncomfortable." That seems like a very powerful idea. How might I see it in my life?

If two "rational" people meet and disagree on the probability of an event (e.g., the AFC team wins the super bowl, the price of Google stock goes up), then both can gain by wagering on the event. In the real world, however, wagering is the exception, not the rule. On the one hand, you could say that getting someone to bet on an event, pay attention to the outcome, and finally make the payoff, is too much work. But actually, if you ask people why they don't bet often with their friends, they will simply say that it would make them uncomfortable to do so.

I'm a big procrastinator. Why does that fall under the category of "hyperbolic discounting" rather than "rational way to spend a Sunday afternoon"?

Procrastination is a way of avoiding uncomfortable choices. Hyperbolic discounting seems to be related to our subjective perception of time, and to the way the brain parses current and future pleasure-seeking - waiting for an hour right now is more painful than our perception of waiting for an hour in the future.

Here is an example of how hyperbolic discounting works: You go to your car dealer seeking a model that has a sound system you want. He says it will take 3 days to get that exact model, but you can drive away right now with one that has a better sound system and costs $300 more. Most buyers will choose to pay a little more and take their new car now. However, if the dealer said that no car is available right now, and he can get the model you want in 33 days, but a model costing $300 more with a better sound system in 30 days, most buyers will choose to wait the 33 days and get the exact model they want. This is hyperbolic discounting at work. Rational consumers with consistent intertemporal evaluation should treat the trade "$300 for an attractive but unneeded accessory versus 3 days" the same whether it is executed right now or executed in 30 days.

I felt like this sentence at the end of your paper was really important -- "Specialized brain circuitry processes experience in ways that are not necessarily consistent with relentless maximization of hedonic experience" - but I didn't really understand what it meant.

Our brains seem to operate like committees, assigning some tasks to the limbic system, others to the frontal system. The "switchboard" does not seem to achieve complete, consistent communication between different parts of the brain. Pleasure and pain are experienced in the limbic system, but not on one fixed "utility" or "self-interest" scale. Pleasure and pain have distinct neural pathways, and these pathways adapt quickly to homeostasis, with sensation coming from changes rather than levels. Overall, presumably as a product of evolution, our brains are organized well enough to keep us alive, fed, reproducing, and responsive to but not overwhelmed by sensation, but they are not hedinometers.

You make the case that humans are social animals more than economic machines, which sounds right to me. So do social network like Facebook and Twitter help us make better choices?

This is complicated. Social networks are sources of information, on what products are available, what their features are, and how your friends like them. If the information is accurate, this should help you make better choices. On the other hand, it also makes it easier for you to follow the crowd rather than engaging in the due diligence of collecting and evaluating your own information and playing it against your own preferences. In net, the information provided by social networks probably improves choices. The down side is that it may make you a lazy decision-maker. There is also a problem that if social networks encourage herd behavior, then they increase the risk of panics and stampedes that lead to market bubbles and instability.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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