Tuesday, April 14, 2009

The construction of value

My title is yet another rip off. This time from Dan Ariely et al.’s 2006 paper Tom Sawyer and the construction of value. In my opinion, this paper lifts the lid on economics. Let me explain.

The majority of economists (there are exceptions) take the preferences of individuals as a given. I prefer watermelons to rockmelons if I am willing to pay more for watermelons. The study of economics can then be seen to answer the following question – given a group of individuals with given preferences, how are resources allocated?

Determining how these preferences are formed in the first place, and how they can be manipulated is an entirely different question, and one economists are only now beginning to grapple with. Psychologists and marketing departments have known for a long time how to influence peoples preferences, but economists have thus far remained quite ignorant.

Personally, I see a serious issues with overlooking the formation of individual preferences by economists. Ignoring the ability to manipulate preferences ignores an important feedback loop when attempting to explain inequalities of wealth. Not only does wealth provide the ability to accumulate more wealth, it provides the ability to manipulate the preferences of others in society. In fact, it is quite interesting to theorise about the impacts of a tradable commodity called a 'preference manipulation service' in a market economy. How would such a theoretical economy compare to one in which all preferences are fixed through time?

But getting back to the main point, that our preferences are revealed by our decisions, how then would we quantify preferences for non-market goods? Non-market goods are those which we cannot directly buy and sell such as air quality, clean oceans and other such things. This is a real dilemma for environmental policy makers.

The problem with surveying peoples’ willingness to pay is that they don’t actually have to pay, and can respond consistently with social expectations. For example a recent ABS survey found that "around one-third of households who were aware of GreenPower were willing to pay extra for electricity generated from renewable sources, but not all of them were using it, with around 10% of households paying for GreenPower electricity". Maybe if we use a conversion factor for such surveys, such as one third or one quarter, we might be close to the truth (if there is a truth).

There is a clear link between Dan Arierly's paper and the methods for surveying peoples preferences. For example, there are substantial priming effects. As a general rule, the more information supplied to the survey participant, the more they are willing to pay for anything! Tell them all the intricate details about the plight of penguins and we will admit that they are more valuable to us. A one liner that penguins are in danger and we won't take too much notice.

The economists dilemma then is whether or not we even have a preference unless we are forced into making the decision. Are preferences up for grabs until the last moment when we commit ourselves to a purchase? Are preferences the quantum mechanics of economics - not really there until observed?

Then again, maybe we shouldn't delve to deeply into this or we might find out just how easily we can all be manipulated and how little we know about ourselves.


  1. Definitely no better time to get back to basics (or make economics basic) and stop fudging numbers.

    (For a future blog; Thought this guy had an interesting story to tell on monetary rewards competing with moral rewards... http://www.ted.com/index.php/talks/barry_schwartz_on_our_loss_of_wisdom.html)

  2. Just checked out the video. Definitely worth a blog, although I don't agree with much of what he says. Check out the comment by Carolyn Sortor:

    I find this confusing if not sloppy.
    He says, "Incentives can always be subverted by BAD WILL." What can't? If you have his "moral wisdom," by definition you don't HAVE bad will; this is tautology.
    What if people in the Switz. survey had 1st been asked if they'd agree to have the waste in their back yard, then had immediately afterward been asked if they'd still agree if they were paid an incentive? I suspect that if the issue were REAL, more people would ultimately accept the waste if paid an incentive than if not.
    The horrible conundrum is, ALL of us either:
    (A) follow all the rules, whatEVER they are (I doubt any of us even KNOW what ALL the rules are that we're supposed to follow); or at least we think minor, unintended infractions deserve leniency;
    (B) think it's ok to break the rules when necessary in order to serve a higher purpose (I'm here, I think most of us are, though we rarely agree as to what constitutes a higher purpose);
    (C) break the rules when it serves our own interests, while feeling at least a bit guilty;
    (D) manage to COMPLETELY delude themselves into believing that's what's good for them is good for the U.S.A. et al.; or
    (E) are complete sociopaths who don't give a f*ck about anything except not getting caught.
    I'm pretty sure everyone who deliberately exercises moral wisdom falls into (B) or maybe (C), & I suspect they learned it at their parents' knees. I suspect almost all the really bad stuff is committed by people in (E), (D), or (A); re- those people, the rest of us have GOT to have checks & balances and incentives, & at least some rules & enforcement, in order to protect ourselves & our planet from rampant predation. He offers no prescription for how to deal with the people in (E), (D), & (A).
    Even genuine personal morality alone cannot be relied upon for any length of time to prevent abuse, because the power that comes from a lack of oversight and checks & balances results, sooner or later, in corruption.

  3. I'll wait for you blog on this, but I don't necessarily agree with her comments. It appears she has just put her spin on Kohlberg's Stages of Moral Development without actually saying why he is wrong.

    I do agree however that financial rewards vs moral responsibility is something that needs to be explored.

    In summary from that talk I just took away a desire for more decisions to be moral rather than financial - but maybe I'm just simple.


  4. That's like asking the etiquette of drinking water when you're dying of thirst.

    I would argue that too many decisions (business & political) are based on fiscal reasoning and rarely moral. For me Kholberg's stages of moral reasoning is interesting philosophy. Morals are forever changing & relative - 95% of the time I don't think you can go too far wrong with the golden rule.

  5. Dan, yes I agree that the golden rule is nice to try to live by, but it doesn't really contribute to solving the disputes encountered day to day.

    If I quite enjoy people using my driveway as a thoroughfare (the opportunity to interact and meet new people), doesn't mean that I should treat everyone else's driveway as public space. But I could do that and be following the golden rule.

    The Heinz dilemma is a great example of this. It didn't matter what stage of morality a person was in, they could justify both courses of action.

    The other point to note is that this is not a recent social problem (of people overlooking morality or social norms to follow rules that have unintended outcomes). This very dilemma is why the golden rule was embedded in religious texts thousands of years ago.

  6. I took away from his speech the need to put EMPHASIS on making moral decisions not just solely financial ones. He also mentioned how the study of ethics is the worst way to encourage moral decision making. This I agree with.

    I'd rather see leadership and then discussion not academics confusing key decision makers.

    To use the golden rule as you have with your driveway I think is not in the spirit of the 'rule'. You may enjoy something, that doesn't mean someone else will - isn't the vision behind the golden rule to think about what THEY would want...? I wish it wasn't called a rule.

    My takeaway points are;

    + Start thinking about morality in business and politics not just money.

    + Encourage moral leaders not billionaires

    + Don't get caught up in the spelling mistakes of morality at the cost of never finishing the story.

    Now time to go make some money .... I mean job creation ;)