Find your inner economist

(featured image credit: Ulleo)

To make good choices, we have to be able to compare apples and pears

Perhaps the most fundamental error that people make when discussing, or thinking about, economics is the belief that, confronted with two or more options, we should always choose the one that delivers the most material benefit (the most utility, as economists call it). This is wrong for at least two reasons.

One is that it fails to take into account the complexity of pretty much every real-life choice. The idea that there is some linear relationship between the quantity of something, and the utility it provides, only holds if we can keep everything else the same. That is rarely true. We can agree that earning more money is better than earning less money, but if we have the choice between two jobs, the salary is usually not the only thing that distinguishes them. The work of the higher-paying position may involve unpaid overtime, travel in your own time, high-risk activities, and whatnot. A bigger house may have more appeal than one with fewer rooms – if it comes with free cleaning. Otherwise the prospect of having to dust and vacuum the library, the TV room, the games room, the music room, the dining room, the study and an array of bedrooms may dampen the appeal somewhat.

But this trade-off neglect is not the worst problem. Assuming only the material aspects of a choice matter overlooks the fact that, ultimately, almost nobody is interested in wealth per se. The cartoon character of Uncle Scrooge, who seems to positively enjoy spending time literally sitting amid his money is just a figment of Walt Disney’s imagination.

uncle scrooge

The inherent utility of money is only for Uncle Scrooge

Material wealth is a means to an end. We use money to buy things, these things provide us with utility, and that utility, in the end, corresponds with the positive emotion we experience as a result. We sacrifice material wealth in return for emotional utility. A three-piece suite, a comfortable and amusing T-shirt, a nice bottle of wine, a CD, a haircut, a holiday, a new car, and even a full tank of petrol (doesn’t being able to drive where you want make you happy?) – they all give us emotional utility.

Obvious, when you think about it. But there is something strange about it. Like the duckrabbit, or the young woman/old lady visual illusions, it is almost impossible to see both views at the same time. When it concerns something that makes us happy, for example, we look at the emotion rather than the corresponding sacrifice. When it’s something that makes others happy but not us, we only see the material downside and wonder how on earth they can spend that much money on something so worthless.

Political climate

A few days ago, British PM Theresa May’s former chief of staff, Nick Timothy, was interviewed by the BBC. On the predicament in which the government finds itself, he said, “I think one of the reasons we are where we are is that many ministers, and I would include Theresa in this, struggle to see any economic upside to Brexit.” Mr Timothy is a Brexiteer, but he is voicing a common viewpoint among the pro-EU side, and delivers a splendid example of this split view.

People who have a positive (or at least a neutral) view of the European Union are baffled that anyone could want a future without an economic upside, or indeed with the disastrous economic downside of a no-deal Brexit. To them, the economic advantages of being part of the customs union and the single market – free movement of people and all – are a self-evident win-win. For people who, in contrast, take a dim view of the EU, there is a trade-off to be made, and leaving the EU may well merit the economic downside of a sacrifice.

Such a political choice is no different from the choices we make every day concerning food, furniture, entertainment and hundreds of other things. Whether we buy a jar of jam or a tin of caviar, an IKEA chair or a designer sofa, a ticket to the cinema or ticket to the opera: there is no economic upside here either. On the contrary: we make a material sacrifice, in return for emotional utility.

Actually, there is a difference. We don’t feel deeply connected to what we put on our toast, where we place our derrière, or what we do for entertainment on a Friday night. The emotional utility we get when we buy these things may be foremost in our mind, but we do not necessarily completely lose sight of the cost. The more the emotional side of a choice is linked to our deepest beliefs or to our identity, however, the more weight it carries, and the harder it is to even attempt to consider the material side.

Weighty emotions can drive a choice, but they can also constrain the choices we are prepared to make. Policymaking regarding climate change tends to focus primarily on switching to renewable energy – that is very much the prevailing narrative. But can solar and wind power really meet all our energy needs, or is there a degree of wishful thinking among their proponents? Should we not consider nuclear energy as an alternative or a complement to renewables to reduce our carbon emissions, or is that too much of a taboo?

When profound beliefs are concerned, we may be tempted into motivated reasoning. If we are convinced our preferred option is the only right one and the other(s) wrong, our own reasoning process gets distorted and we evaluate possible outcomes (or routes to an outcome) accordingly. We build our argument based on a one-sided reading of the evidence. We selectively invoke examples where our preferred option is manifestly superior, or where the alternatives miserably fail. It is almost always possible to find real facts, and certainly hypothetical ones, that serve our position – but that means little.

Arguments produced by motivated reasoning feel totally rational if they’re our own, and wholly unfounded if they’re not. This is what leads to the typical futile discuss around complex and controversial issues: both sides debate from an unshakeable perceived position of being right.

When belief meets reality

But the problem with the deep belief that our preferred choice is the only right one does not just materialize in discussions with people holding a different view. There is nothing wrong with being convinced about the best course of action, and to dream about a world in which that course of action is being pursued. But for that dream to really come true, our conviction needs to survive the confrontation with reality.

nuclear windpower

Nuclear or wind – which is right? (photo: Jeanne Menjoulet CC BY)

We can dream of a world in which we have stopped blowing carbon into the atmosphere thanks to wind turbines and solar cells, or thanks to nuclear reactors, but the emotional upside of that world will not arise of itself. There will be costs (in cash, or as the hassle of lifestyle changes), there will be conditions that need to be met, or that will be attached to the chosen solution. There will be side effects that need to be dealt with, and there will be sacrifices that need to be made.

There will be a material downside.  And to make good choices we need to compare the apples of the emotional upside with the pears of the material downside.

But promoting or defending what we believe to be absolutely right focuses us too much on the emotional upside, and makes us neglect the material downside. Because life is, after all, not about material things, but about emotions, right? That’s handy, since we don’t like spending money, we don’t like having to change our lifestyle, or dealing with undesirable side effects and consequences. But sooner or later, we need to settle the material bill for our emotional upside.

The economic way of thinking can stop us from being blinded by our belief that we are right, and ensure we don’t overlook the downside of our choice. Let’s look at the so-called facts that we are citing to support our position. Would an opponent use the same facts, in the same way? If not, we are probably being selective. We also have to consider the facts that go against our preferred position, and build a picture of the material downside – and hence the emotional downside. If we act as if the downside doesn’t exist, the upside is just hot air.

Will doing this not stop us from dreaming? It shouldn’t. What it will do is burnish our dreams, by putting them up against reality. If they can stand the challenges of the harsh real world, if we understand the sacrifices they will demand from us, they’re dreams worth pursuing, because they can come true. And if, in the process, we need to adapt our beliefs, hey, so be it.

Find your inner economist. Let them loose on the emotional upside and the material downside of your beliefs. That’s the way to realize your dreams.

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About koenfucius

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

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