How economics can help us understand people better

When we think that the behaviour of others is baffling or if it seems utterly wrong to us, economics can help us take a different perspective

You may not realize it, but every time you are placing your purchases on the conveyor belt at the supermarket checkout, you are allowing everyone around you to cast a glance into your inner being. The content of your shopping trolley tells others an awful lot about you – or that is at least what a certain economic theory would say.

For every single article represents a choice – or to use the economics term, a revealed preference. The assumption is that when you put a container with washing up liquid, a box of eggs, or a tin of soup in your trolley, these are the items you prefer. And it’s not just your supermarket shop – it’s the socks you wear, the place where you get your coffee fix, the smartphone you use, the car your drive, the place you live and so on. In all these and many more domains, there are numerous options from which you could choose – so the bundle of your actual choices uniquely characterizes you, almost in the same way that your fingerprints do.

checkout

Just look at my preferences! (photo: John Garghan CC BY)

For every single article represents a choice – or to use the economics term, a revealed preference. The assumption is that when you put a container with washing up liquid, a box of eggs, or a tin of soup in your trolley, these are the items you prefer. And it’s not just your supermarket shop – it’s the socks you wear, the place where you get your coffee fix, the smartphone you use, the car your drive, the place you live and so on. In all these and many more domains, there are numerous options from which you could choose – so the bundle of your actual choices uniquely characterizes you, almost in the same way that your fingerprints do.

What we feel, what we say, what we do

The Theory of Revealed Preference was pioneered by the economist Paul Samuelson, around 80 years ago. Samuelson hypothesized that the preferences of an individual can be inferred from observing their behaviour. That should be better than simply asking people for their preferences, especially where market research is concerned. As David Ogilvy, the legendary advertising tycoon, once remarked, “Consumers don’t think how they feel. They don’t say what they think and they don’t do what they say.” People’s actions speak louder than their words.

But there are some problems with the assumption that people’s actions really reveal their preferences. Preference over what? Few people consider all, or even most of the possibilities when they make a choice. Often, good enough is good enough, and we simply pick from a set across which we are pretty indifferent. Or perhaps our choice has nothing to do with a specific preference. Maybe we always pop into Costa for our coffee, not because we prefer its taste over that of Starbucks, but because it’s a convenient place to meet a colleague on our way to work. Or maybe it’s a case of self-herding: we once went to this coffee shop, we went back, and it became a habit for no particular reason. Maybe we are wearing blue striped socks because that is what our other half keeps getting us as gifts, not because blue stripy things are something we particularly like.

But that doesn’t mean it’s impossible to infer anything from other people’s actions. When there is good reason to believe that they have made a deliberate trade-off between two options, or that they made a clear sacrifice, we can get some sight of their preferences.

This occurred to me when I was thinking about an intriguing phenomenon in Belgium these last few weeks. Quite different from the gilets jaunes, secondary school students have been skipping school on Thursdays to demonstrate in the capital demanding more, and better action to deal with climate change. 3,000 of them turned up on 10 January, 12,500 one week later, and on 24 January there were 35,000.

While there is a good deal of sympathy for their concern over climate change (not least from King Philippe), not everyone is enamoured by the fact that they are skipping school. The head of the school where one of the instigators is a student points out that the protestors will be sanctioned for playing truant, and that they have a responsibility to themselves and their future, (which they are putting it at risk by their unauthorized absence). According to the group leader of the largest party in parliament (also a former teacher) believes “addressing one problem – climate change – with another one – skipping school – is totally wrong.” And many members of the public seem to agree as the reactions to the press article suggest (Google Translate may be your friend). Why don’t they demonstrate on Wednesday afternoons (when there is no school in Belgium), or in the weekend? Would it not be better if they boycotted the music festivals in the summer than to skip school?

Dissecting the trade-offs

Can we infer something about these young people’s motives from what they sacrifice? Some people believe skipping school is not much of a sacrifice. There are two reasons to question this view, though. If the students prefer playing truant over sitting in class, they would not need a demonstration to do so. More importantly, most of them will have to catch up the missed lessons and even risk detention. We can therefore reasonably conclude the sacrifice is real.

spijbelaar

My trade-off: I’d rather be labelled a truant than have a climate disaster on my conscience

So, skipping lessons is a costly signal – a concept from evolutionary biology that has found its way into economics. By showing they are willing to accept the negative consequences, they give an indication how strongly they feel about climate change. This is not unlike, say, a big bank signalling its strength through the amount of expensive marble in the lobby of its headquarters, or a male elk doing the same by carrying a huge, cumbersome set of antlers. We can trust the bank to be robust, and the female elks can trust the male to have superior genes.

When we see behaviour that we don’t quite understand, it is worth considering the sacrifice that might be involved. Someone who makes a deliberate choice will probably have made a conscious cost-benefit analysis, weighing up whether the upside is worth the cost. Why on earth, for example, would someone choose to live so far away from their work in the capital that it costs them three hours’ travelling every day, and thousands of pounds (thousands of euros, thousands of dollars) for their annual season ticket? It is probably because to them the benefit outweighs the cost. We see that cost, but we should imagine what the benefit might be, Maybe the job pays well, maybe they can live in a nicer house than they could closer to the big city, or maybe they prefer to live near their family and friends. We may not know exactly what it is, but we can reasonably infer that there is something that makes it worth it for them.

So it is for many of the thousands of kids skipping school to demonstrate for more robust climate action. For some it may just have been social proof, joining in with their friends, but many will have made a deliberate choice, signalling how important their demands are to them by what they give up.

And that is not the only way economics can help us understand them. Imagine we don’t care all that much about climate change, and we strongly believe that it’s definitely not worth skipping school for. Now let’s ask ourselves whether there is nothing – not a single cause – for which we would think playing truant is justified. There probably is. Instead of thinking “they shouldn’t do that”, or “I would never do that”, we had better think “what would make us do that?” Once we have identified what would make us believe skipping lessons and risking detention is worth the trade-off, we have a much better idea of the strength of these students’ conviction.

Economics is sometimes called the dismal science. But if it can help us understand our fellow human beings better, that seems perhaps a little harsh.

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About koenfucius

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

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