Pernicious zero-sum thinking

(featured image credit: Jason Rowe)

The assumption that buyers are losers and sellers are winners is a hardy perennial, and risks making us all into losers

Here is a puzzle (it’s based on an old one, as you can tell by the amounts). Joe buys a horse for $60, and sells it to Jack for $70. He then buys it back for $80 and finally sells it again to Jack for $90. Is Joe better off at the end of this sequence, worse off, or neither? What about Jack?

Money is extremely useful – it is hard to envisage the modern economy without an instrument that allows us to store of value and a medium of exchange. Imagine bartering for the weekly grocery shop, an annual season ticket for the train, or for gas and electricity. But money is also a unit of account **, and that affects how we think about economic transactions.

If you calculate what happens with Joe’s finances, you come to the conclusion that he ends up with $20 more than he started. That would seem to make him a winner. But what about Jack? The $20 in Joe’s pocket must have come from somewhere, and that can be from nowhere else than from Jack. Most people who are not die-hard economists would therefore consider Jack the loser.

We seem to have a deep-seated conviction that buying and selling are zero-sum transactions. And that is not even so strange when you consider bartering. When two people are exchanging ten cabbages for a goat, then there is no obvious reason why there should be a winner. There is simply an equivalence between the two. This kind of transaction is like changing a 5-pound note for five pound coins.

On the winner-loser see-saw

But as soon as we consider that one person gains, then the other loses – as if you get only four coins for your fiver. This overlooks the essential economic truth that, in a voluntary transaction, by definition both parties stand to gain (otherwise they would not engage in it). When Joe sold the horse to Jack he valued the money more than the horse; Jack thought the opposite. So if Jack ends up with a horse he values at more than $90, can he really be a loser?

horses

Still a bargain at $90! (image: Devanath)

One horse always equals one horse, but the $90 price tag of the horse at the last transaction incontrovertibly appears as more than the $60 at the first one. The salience of money reinforces the win-lose frame. It makes us think we are unconditionally richer if we have more of it, and poorer if we have less. Loss aversion can make us feel the pain of paying more than we feel the gain of the good or service we purchase. That fuels mercantilist beliefs that money is inherently more valuable than what it can buy.

 

So it is hardly surprising we are reluctant traders. We feel every purchase as an erosion of our wealth – as a buyer we end up with less money, and hence worse off, and the seller, receiving the money, better off. Their gain is our loss.

What’s behind the zero-sum?

A new paper by Samuel Johnson, a cognitive scientist at the University of Bath’s School of Management, and colleagues explores people’s profound zero-sum thinking. In particular, the authors investigate the barter mindset and mercantilist beliefs as possible explanations.

In one of their experiments, people were presented with a set of voluntary transactions. These included monetary purchases of goods (a shirt, olive oil, a car and a chocolate bar), monetary purchases of services (like a haircut), and bartering of goods (a Burger King hamburger for one of McDonald’s, or a bottle of soy sauce for a bottle of vinegar). For every transaction, the participants had to indicate for each of the two parties whether it made them better off (positive outcome), worse off, (negative) or the same (zero), compared to before the transaction.

Overall, 94% of participants found that at least some of the parties failed to benefit from one or more of the exchanges – a clear illustration of zero-sum thinking. The graph below shows the detailed results.

According to economic theory, in a voluntary transaction both people should be winners, so the blue bars should be at 100%, and the other at zero. But that is not how participants saw things.

88% of them found that, in monetary transactions, the seller won, but only just over 60% thought they buyer did, and for the bartering exchanges, less than 50% thought the traders gained with the exchange.

The buyer was considered to be a loser in 32% of the cases, five times more than the seller (6%). Bartering was seen as a transaction without winners or losers by 41% of the participants.

These findings appear to confirm the idea that there is a sizeable tendency to consider bartering transactions as zero-sum, and that the use of money creates winners and losers in the perception of those who adhere to this view.

In a second experiment, they provided the participants with a motivation to engage in the transactions for the buyers in the monetary transactions (and for both traders in the barter situation). This dramatically reduced the incidence of zero-sum thinking by about half. The same relative pattern persisted: buyers were still more likely to be seen as losers than sellers. The authors conclude that zero-sum thinking is driven to a large extent by an error in perspective-taking. Unless prompted, we focus on the party is seeking to gain money from the transaction, and neglect the value that can be experienced by the party receiving goods or services.

Politicians vs economists

Generally, this zero-sum thinking does not appear to affect us too badly, though. We may, at some level, feel that sellers enriching themselves at the expense of us, the buyer, but that doesn’t prevent us from happily going shopping every so often.

However, this is not necessarily the case when politicians give in to their (or the electorate’s) mercantilist tendencies. In an intriguing case of double symmetry, while economists from both ends of the ideological spectrum agree on the positive-sum nature of free trade, populist, anti-trade politicians can be found at both sides of the political spectrum.

trumpo

Would you buy a used horse from this man? For $90? (image: Gage Skidmore)

When they act on the mistaken belief that trade deficits in themselves make a country worse off (and that trade surpluses make them better off), and go so far as Donald Trump earlier this week with tariffs on imports of steel an aluminium, we are truly heading for a lose-lose outcome.

If economists are really as powerful in influencing people as some maintain, a succession of them, all the way since Adam Smith, should have easily convinced people of the positive-sum nature of free trade. The fact that zero-sum thinking is as pervasive as ever casts serious doubt on that belief. Alas.

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About koenfucius

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

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