International Law

Do You Believe Weird Things?

Michael Shermer wrote an article entitled "Why people believe weird things about money"

He writes:

"Would you rather earn $50,000 a year while other people make $25,000, or would you rather earn $100,000 a year while other people get $250,000? Assume for the moment that prices of goods and services will stay the same.

Surprisingly -- stunningly, in fact -- research shows that the majority of people select the first option; they would rather make twice as much as others even if that meant earning half as much as they could otherwise have. How irrational is that?

This result is one among thousands of experiments in behavioral economics, neuroeconomics and evolutionary economics conclusively demonstrating that we are every bit as irrational when it comes to money as we are in most other aspects of our lives."

And why are we so irrational?

Shermer claims that:

"Regret falls under a psychological effect known as loss aversion. Research shows that before we risk an investment, we need to feel assured that the potential gain is twice what the possible loss might be because a loss feels twice as bad as a gain feels good. That's weird and irrational, but it's the way it is. "

How does evolution explain risk aversion?

"If there are behavioral analogies between humans and other primates, the underlying brain mechanism driving the choice preferences most certainly dates back to a common ancestor more than 10 million years ago. Think about that: Millions of years ago, the psychology of relative social ranking, supply and demand and economic loss aversion evolved in the earliest primate traders.

This research goes a long way toward debunking one of the biggest myths in all of psychology and economics, known as "Homo economicus." This is the theory that "economic man" is rational, self-maximizing and efficient in making choices. But why should this be so? Given what we now know about how irrational and emotional people are in all other aspects of life, why would we suddenly become rational and logical when shopping or investing? "

I think that the initial premise is wrong. Why is it clearly irrational to prefer making twice as much as other people, as opposed to making 40% less - assuming that the goods you can buy cost the same? (Which may be unlikely, in any event.)

If part of my well being is due to establishing my reputation, then buying more goods and showing them off may be a very important signal of that reputation. Far from being irrational, or even unreasonable, the majority of individuals are claiming that comparative or reputation goods are more important than mere consumption goods.

Envy may be wrong, but it isn't by definition irrational. Or is it?

Full post as published by Misleading Advertising Law on January 16, 2008 (boomark / email).