Tuesday, July 26, 2011

Economic Analysis and Irrationality

The assumption of complete markets and profit-seeking is a powerful tool. It helps you analyze a lot of claims. Put simply, the process is like this:

1) If this were true, could people make money exploiting it?
2) Are they?

For example, it is often claimed that people do not learn much in college, that it is just a wasteful signalling game. If this were true, then large companies could save a lot of money by giving jobs to high school graduates with high test scores. They rarely do so, which is evidence that you actually do learn things in college.

Now consider the claim that medical care is mainly about social signaling and feelings of status, and that people are either really bad at evaluating the actual outcomes of medicine, or that they do not really care.

If this were true, then people could make lots of money by offering 'medical care' that had no actual physiological benefit. They would just claim to be a provider of medicine, and people would pay them money. Societies all over the world would be filled with quacks taking money from people and providing nothing but a feeling of being cared for.

That sounds like the world we live in. Maybe we should take this claim seriously.

If a proposed inefficiency or irrationality is real, then people will be making money exploiting it. You can also run this process in reverse. Look for businesses that make a lot of money delivering things of dubious value, and then try to figure out what kind of irrationality drives the demand for their product.

A traditional example is gambling. People will pay lots of money to gamble. At best they do so with the knowledge that they are paying for entertainment, and at worst they ruin their lives. Cognitive scientists have studied gambling extensively and used that data to identify flaws* in the way that people instinctively analyze risk and reward.

One thing that is not analyzed nearly as much is television. It is so ubiquitous that most people do not consider it. But its existence really is bizarre. Why would people be willing to pay upwards of $100 a month, or even go without enough food, for the privilege of having someone waste their time with a parade of vivid lies that distort their sense of reality? What cognitive flaw is at work here?

We know that telling stories is a form of social bonding. A tribe that has a strong shared identity will survive better than one that does not. We know that people have a strong desire to learn about the personal lives of their associates and people in positions of power. People who learned these things were better able to predict and manipulate the actions of others, increasing their chances of survival. We know that people have a desire to be close to attractive and/or powerful people. Gaining such people as allies increases survival chances.

Television appears to be a fake superstimulus substitute for all of these things, just like a candy bar is a fake superstimulus substitute for fruit. Television satisfies the desire for knowledge of and interaction with real people, but in a way that leaves you worse off. It is a lot like drugs or alcohol, only the effects are less obvious and extreme.

I am aware of the fact that I waste my time watching television, and with similar activities like reading fiction novels. I watch television a lot less than most people, and less than I used to, but sometimes I relapse. It is extraordinarily hard to break an addiction when the culture you live in supports and enables that addiction.

A complicating factor is that if enough people watch the same television show, then it becomes an actual part of your culture, and you will be left out if you do not share in it. Alcohol is a good comparison here. The stuff is mostly harmless if you drink it socially and in moderation, but if you drink alone, it is a strong signal that you have a real problem. Television should be treated the same way. Try to limit your use to social occasions. Only watch something if several of your friends are talking about it, and if you also enjoy it a lot. Watching something that you will never talk with anyone about is like getting drunk alone. It may seem pleasant while you do it, but the long-term effects are very bad.

* These mental processes were not necessarily flaws in the environment that they evolved in. But the world has changed, and we have to adjust to the new reality.

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