The problem with preferences

(Featured image: Images Money)

Can an objective measure like money help determine what we really, really want?

A cynic, Oscar Wilde wrote in his play Lady Windermere’s Fan, is “a man knows the price of everything, and the value of nothing”. This suggests that price and value are two different concepts, which apparently corresponds well with what we see around us. We generally don’t pay our hosts when we’re invited to a dinner party, but we take a gift. Neither the cost of the ingredients nor the price of the gift are particularly material here. We normally don’t ask friends to contribute to the cost of running our car when give them a lift.

Behavioural economics too seems to fit this perspective. One of its findings is that people appear to behave differently depending on whether they believe themselves to be in the market domain (where prices are essential) or in the social domain (where they don’t figure at all). An often quoted example is that of the Haifa daycare centre featuring in Uri Gneezy and Aldo Rusticini’s paper “A fine is a price”. Most parents habitually picked up their offspring before the stated closing time of the centre. They did so without any external incentive: social norms (and quite likely avoidance of guilt) were enough – but not for all of them. When a fine was introduced for picking up one’s child late, however, the number of parents who did so went up. They saw what was intended as a fine (a social intervention) as if it were a price (a market instrument), and simply ‘bought’ extra childcare time.

So there may be a social domain and market domain, but what the parents’ behaviour highlights is that there is a connection between the two. It seems to be possible to put a price on embarrassment or guilt – and indeed on a lot of stuff that is not quite in the market domain.

Under the heading  ‘The Worth’, Decision Technology regularly reports on their research into what people would be prepared to pay for certain weird and wonderful things. For example, 29% of respondents in one of their surveys would be willing to pay at least £20 to access the information that the Government holds about a person of their choice. More than 50% would pay that amount to have dinner with a guest of their choice.

realthingpreference

The price of preference

Part of the implied criticism of the cynic in Oscar Wilde’s play is that some people focus only on money. But money does have an appealing characteristic: it provides an objective yardstick that allows us to indicate relative preferences. If we prefer the real thing instead of a low cost own brand, or a guitar that was once owned by Beatle George Harrison over a brand new model, then that is reflected in the higher price we are prepared to pay. If people are prepared to pay more for a house on a river bank, for a car with enhanced safety features, or for a live performance of an opera on a cinema screen rather than a recording, then that reflects their preference.

And as we’ve seen, that can work just as well outside the obvious market domain. We can ask others (or indeed ourselves!) how much we’d be prepared to know the date of our death (or indeed not to know it). We could ask how much more we’d need to earn if we had to spend another hour commuting each day. I am certain that with just a modicum of imagination you could come up with dozens more such intriguing questions.

What we want, what we really really want

Does using money as a yardstick to measure our preferences really give an accurate picture of what we want? A paper by economists Gerardo Infante, Guilhelm Lecouteux and Robert Sugden casts doubt on that idea. In it, they scrutinize the central assumption of neoclassical microeconomics that people have stable and consistent preferences, independent of context or circumstance.

This assumption implies that we somehow know the value of everything and anything. In order to consistently express a preference of one thing over another, we have to know the value (to us) of each one. And if we have no preference and we’re indifferent, then their value is the same.

That looks not unreasonable at first sight. But can we really maintain a coherent set of preferences on this basis? If you know what an apple is worth to you, and you know what a new car is worth to you, you should be able to express the value of the car in terms of a number of apples. However, you also know the value of a haircut, a pair of socks, or of your broadband contract and so on. So you should be considering all these equivalences whenever you’re presented with a choice. It would likely drive you crazy in no time.

So we have ways of limiting the need for such an astronomical number of possible equivalences, like the use of money, and of mental accounting, by putting items in categories. Even if we cannot consistently compare apples with cars or socks, as long as we’re consistent in comparing apples with cream cakes, we’re fine, right?

creamcakes

My true preference… or is it? (photo: Piotr Adamiak)

Certainly – at least if deep down, we are rational and we know what we really, really want. Our problem would be that we make ‘irrational’ decisions because we are fooled by external (choice architectures) or internal (inappropriate heuristics or beliefs) influences.

But Infante et al argue that, even for a Superreasoner, a hypothetical being with the intelligence of Einstein, the memory of Big Blue and the self-control of Gandhi, it is not possible to establish a context-independent preference between a piece of fruit and a cream cake. There is no reason why Kahneman’s calculating and logical System 2 is the real keeper our true preferences, and that decisions we make in a cold state are ‘better’ than those we make in a hot state under the influence of the emotional and impulsive System 1.

The consequences of unknown preferences

All this explains why and how we can be manipulated. People who want to sell us stuff can influence our preferences. If we don’t always prefer apples over cream cakes (or vice versa), then by arranging them in a particular way (the choice architecture), or by advertising them in a particular way (framing), we can be nudged into choosing one over the other.

This is not new, of course. Marketing people have long known that shiny apples and brightly coloured cans of pop sell better than dull ones. And there is nothing inherently improper about using these insights. We know full well that someone trying to sell us something is doing so in their own interest in the first place.

It does raise a problem regarding paternalistic interventions, though. These rely on the assumption that the preferences of the person being nudged are known. If it turns out that these cannot be known, can governments really be deemed to act in our interest?

Governments may perfectly legitimately seek to improve public health because it keeps healthcare expenditure under control, or to encourage people to use public transport because it reduces traffic congestion and the corresponding cost to the economy.  If it can nudge us collectively to change our behaviour to make this happen: great.

But that is quite different from claiming it is acting in our individual self-interest. If we don’t know our own preferences ourselves, isn’t it a bit arrogant for government to pretend they know?

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About koenfucius

Wisdom or koenfusion? Maybe the difference is not that big.
This entry was posted in Behavioural economics, Economics, Uncategorized and tagged , . Bookmark the permalink.

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