Saturday, August 18, 2012

The Value of Choice: A Behavioral Economic Analysis

I've written previously about Behavioral economics, a field I'm about to study for a MSc in, and how behavioral economics isn't necessarily a left-winged science but instead can be used both to defend limited government and fiscal discipline (it's hard to have one without the other btw). A short introduction to those unfamiliar with the field: Behavioral economics combines psychology with economics, and looks at how human behaviors affect the economy. While "regular" economics assume humans are rational, Behavioral economics concedes that humans do in fact sometimes act irrationally. Behavioral economists study irrational behaviors, how they affect the economy and what we should do about them.

Today, I'd like to continue on that theme. I recently read a book, "Predictably Irrational" by Prof. Dan Ariely who is a recognized expert and researcher in the field of behavioral economics. It was one of the best books I've ever read and I definitely recommend it, but my interpretations of the studies and experiments that he presented are very often not the same as the ones he himself made.

Prof. Ariely is, in the simplest of terms, a leftist. That doesn't make him a bad researcher - on the contrary, I'd argue he's one of the best in the world in economics. He has his academic freedom, and I have mine - I have no problem with that. However, two things that he wrote about in his book has not only economic but also political implications that may go further than he himself thought.

The first one is in Chapter 8, "Keeping doors open: Why options distract us from our main objective". Basically he ran an experiment where he found that people have a tendency to act in a way that keeps all doors open, even doors that we aren't very good. Prof. Ariely is puzzled by this behavior and considers it a case of (predictable) irrationality (irrationality in an economic sense means not maximizing your utility, ie happiness). I would suggest a much simpler explanation: Options generate utility.

Think about it: Isn't it nice to have a choice? Even if you know what your going to buy (let's say; a green t-shirt) it's nice to know that there are other options, in case you'd suddenly change your mind or something. You may actually be more inclined to visit a shop that has both red, green, white and black t-shirts (and maybe long-sleeved shirts as well) rather than one that has just green t-shirts. In general, choice is kind of a nice thing to have.

Also, one thing that certainly doesn't make most of us very happy (something that generates disutility, to use economic terms) is when someone tries to make our choices for us. You may have intended to send your kids to a public school - but it still makes you angry when your state bans homeschooling. Not because you had any intention of homeschooling, but because you want to make that decision yourself. When the state decides how you educate your kids, the state essentially says that you're too dumb to make that decision on your own. And you rightfully feel insulted by this.

Do you see where this is leading? Probably not, so let me explain further. If fewer options mean less happiness, then regulations which (almost by their very definition) limits options will also mean less happiness. Great, so let's just dismantle the state and live in a joyful anarchy then... ? No, not so fast. Regulations can of course generate happiness through other ways - for example, regulating subprime lending might generate happiness because fewer people will end up losing their homes, and this will make up for the lost happiness caused by the regulation itself.

Yet, if options generate utility, then it follows that regulation is a necessary evil that should be used sparsely and only as a last resort. In short, the very thing that conservatives have said all the time has been proven scientifically correct.

The second thing in this book that has a political application (to be honest, there are more than two things - but listing every possible political application of what he writes would take too long, and I suspect half of you are already asleep by this time) is chapter 5, "The influence of arousal: Why hot is much hotter than we realize". I'm not going to go through the experiment he conducted in detail (if I did, Rightspeak wouldn't be such a family-friendly site anymore - read the book and you'll understand), but basically what he found is that people act very differently when they are in their "hot" state than when they are in their "cold" state. The hot state is the state of arousal - it could be sexual arousal, but also just pure excitement or rage.

For example, we all know credit card debt is something we should avoid. Credit cards are only to be used for real emergencies. They're not toys and we all know it. Yet, when you're standing there in the shop, two days before you get your next paycheque, and you feel the urge to buy that watch/dress/suit/other expensive item, a credit card payment doesn't really seem like such a bad idea anymore. Now, you are in your hot state - and whatever you thought in your cold state (before you went to the shop and fell in love with the watch) is now irrelevant. Sure, you might regret your actinns once you are back in your cold state, but by that time it may well be too late to do something about it.

Other cases of "Hot vs cold state" include speeding, parking violations and having unprotected sex - all of them decisions usually made in the heat of the moment, and very often regretted later on.

So again, what does this have to do with politics? Well, I don't know about you, but I observe this kind of behavior all the time in politicians. They know fully well that deficit spending is only to be used during recessions (if even then). Anyone who's taken just a few introductory modules in economics knows this. So why has the US run deficits nearly every year since the 1960's?

The explanation is that politicians may know something in their cold state (that deficit spending hurts the economy), but in their hot state, they don't act upon this knowledge. Kind of like how you know that speeding is wrong and endangers fellow human beings as well as yourself, yet when you're 5 minutes late to a meeting, it still suddenly seems like a good idea.

OK, but what could bring a politician to his hot state? What could make him act against his knowledge? Elections are the first thing that spring to my mind. Deficit spending must surely seem tempting to a politician in the middle of a fierce re-election battle. And cutting spending - since it usually means cutting public sector employees or salaries - is never popular anyway. And then there are plenty of special interest groups a politician has to please in order to get the necessary amount of campaign donations and influential endorsement. It all adds up - a politician may honestly tell you in his cold state that he wants to balance the budget, just like you honestly don't want to break the speed limits - but when it's time to take action, when push comes to shove, you both end up acting against what you deep down know is the rational thing do to.

This is one of the biggest reasons why we need constitutions. Constitutions act kind of like a breathalyzer, stopping you from doing something in your hot state that you deep down know is stupid. And; this is why we need a balanced budget amendment. I don't support a BBA that would never allow an unbalanced budget, but I would definitely support an amendment that would force the budget to be balanced over for example 10 years, which would stop deficit spending from becoming a habit, which is what it is now.

So while I believe Prof. Ariely is correct about the power of arousal, I suggest we apply this knowledge more broadly. We need to recognize that governments consist of humans made out of blood and flesh just like the rest of us, and whenever we analyze government and government intervention, we have to keep this at the back of our heads. Governments are also guilty of all the irrational behaviors that markets, consumers and companies are guilty of. And when government goes irrational, it tends to hurt more people than when consumers and companies do.

That is why we conservatives are more leery of government than we are of market agents. The "power of arousal" is not a case for government intervention as much as it is a case for strong constitutions. Again, economic science backs up what we conservatives have been saying for centuries.


Finally, I want to talk a little about conservatism and academia. Several people - some of them well-meaning fellow conservatives, some of them liberals - have suggested that studying Behavioral economics is a waste of time for me. After all, they say, behavioral economics is a science used and invented by leftists.

They're missing the point.

I don't mind walking into the lion's den. I've been doing that ever since I first became involved in politics as a 10-year old. And truth to be told, we need more of that. We need more conservatives who can storm the liberal lions' dens. It's so much easier when you're not alone.

What I mean is; we should not be afraid of using traditionally left-winged sciences to argue for our cause. If we refuse to arm ourselves with weapons that have been used against us, soon we will find ourselves unarmed. 

We cannot concede academia. We cannot just rely on the votes of the uneducated. The most successful conservative President in recent memory, Ronald Reagan, came out of the intellectual conservative movement. If the Republican party is to survive, it will have to once again have to become the kind of movement that brought us Ronald Reagan. If we don't, and instead decide to become the kind of movement that brought us Christine O'Donnell, then we will perish. And we'll deserve it.

Thank you for reading,
John Gustavsson

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