In this diavlog with Glenn Loury the behavioral economist Sendhil Mullainathan recounts the results of an experiment.
- If given the option of paying $100 for an item vs. $80 for an item, but in the second case having to go across town for the item, respondents choose $80 and going across town
- If given the option of paying $1000 for an item vs. $980 for an item, but in the second case having to go across town for the item, respondents choose $1000 and not going across town
This the result of a heuristic bias whereby we seem to perform comparisons as percentages, and not the absolute value of currency. You save $20 in both cases, but the proportion is much smaller in the big ticket item. That’s not too interesting, what is interesting is this: Mullainathan claims that poor respondents actually choose to go across town in both cases because to them the $20 is very tangible. In other words, in this case the poor behave as the rational actors which neoclassical economics is predicated upon, because they operate in a world of such cash scarcity that they perform numerical calculations habitually to estimate trade offs. Much of the rest of the discussion involves these sorts of insights (if you’ve ever been on vacation and start out with a fixed amount of money you’re going to expend, I suspect you see how this works as you progress through the vacation and have less and less money you can spend).
Mullainathan as a behavioral economist emphasizes the importance of psychology in understanding human action, but listening to him I felt that the real truth here was more fundamental and neurological. In How We Decide Jonah Lehrer reports plenty of data which show that the utilization of the prefrontal cortex to engage in rational action which overrules impulse is strongly conditioned on how much stress we are under and energy we have on hand. In my discussion with Jake Young last year, Jake, a neuroscientist with a deep interest in economics. pointed out how that the fixation on relative calculations may simply be a function of the fact that general relative rules and heuristics are computationally less expensive than encoding specific absolute values.
It is an irony here that one of the problems with modern economic science is that the scholarship of scarcity does not account for the scarcity of resources on a deep neurological level. Rather, the rational actor’s prefrontal cortex has an infinite amount of cognitive juice at its disposal, and choice itself is not taxing. But in reality, a utility function in regards to choice always has to take into account that the act of choice itself is subject to the rules of scarcity. The brain uses 25-30% of our calories, far more than in a typical organism.