Psychology can be a tricky thing. Experimental results often seem to indicate very surprising things about human behavior, but the lack of context in an experimental setting can often obscure the data, or make it difficult to draw clear inferences. One area in which human behavior is especially hard to understand is that of financial reasoning. This article in the LA Times (hat tip: Freakonomics Blog) does a particularly poor job, in my opinion, of drawing conclusions from some experimental data in that domain. From the article:
Would you rather be A or B?
A is waiting in line at a movie theater. When he gets to the ticket window, he is told that as he is the 100,000th customer of the theater, he has just won $100.
B
is waiting in line at a different theater. The man in front of him wins $1,000 for being the 1-millionth customer of the theater. Mr. B wins $150.Amazingly, most people said that they would prefer to be A. In other words, they would rather forgo $50 in order to alleviate the feeling of regret that comes with not winning the thousand bucks. Essentially, they were willing to pay $50 for regret therapy.
That seems like a fairly broad claim, but the article goes on to describe experiments with capuchin monkeys and a rather innovative "fruit-based" economy, which shows that, like with humans, losses are considered to be twice as bad as gains. All of this seems like reasonable research, but the author starts in on the theme of "can you believe how irrational we are?":
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?
First of all, this author clearly knows very little about modern psychology, which would shudder at his equating of emotional and irrational, but the bigger transgression is his conclusion that this is irrational behavior in the first place. Whenever a result like this is uncovered, it immediately has to be squared with notions of fitness and evolution. Either this instinct serves some bigger purpose, or it is a holdover from a time when this instinct was valuable but is no longer (or there is a remote possibility that it has been genetically "bound" to another. more valuable trait, but that can be incredibly difficult to show). The author of the article makes no attempt to try to understand why we might have such a behavior, but I would guess that we simply have a default risk-tolerance profile that was evolved to be the 2:1 gain-loss ratio. Just because this can be triggered by other unusual circumstances doesn't mean that it isn't an overall good strategy. That would be like saying that the eye-closing reflex is "irrational" because it can be triggered by imagery in 3D movies.
Later in the article, it talks about one of my favorite, and to me, most misunderstood, pieces of psychology of economics research, the ultimatum game:
Consider one more experimental example to prove the point: the
ultimatum game. You are given $100 to split between yourself and your
game partner. Whatever division of the money you propose, if your
partner accepts it, you each get to keep your share. If, however, your
partner rejects it, neither of you gets any money.How much
should you offer? Why not suggest a $90-$10 split? If your game partner
is a rational, self-interested money-maximizer -- the very embodiment
of Homo economicus -- he isn't going to turn down a free 10
bucks, is he? He is. Research shows that proposals that offer much less
than a $70-$30 split are usually rejected.Why? Because they
aren't fair. Says who? Says the moral emotion of "reciprocal altruism,"
which evolved over the Paleolithic eons to demand fairness on the part
of our potential exchange partners. "I'll scratch your back if you'll
scratch mine" only works if I know you will respond with something
approaching parity. The moral sense of fairness is hard-wired into our
brains and is an emotion shared by most people and primates tested for
it, including people from non-Western cultures and those living close
to how our Paleolithic ancestors lived.
Has the author never attempted to conduct a deal? Try making a few deals where you leave money on the table, and you'll find out how quickly word gets around that you are an easy mark. People citing this type of research always wan't to tie it into a notion of fairness, but I don't think fairness is a factor at all. It's about reputation. The message that you won't make a bad deal is far more valuable in terms of future dealings than the small cash you might have pocketed up front. Just because the game as played has no consequences for the future doesn't mean that we can simply turn off the instinct that says "make a statement about how you are a tough negotiator, even at the expense of a few bucks".
The final statement of the article just makes it clear that the author has an axe to grind, and does not in fact have any understanding of modern psychology:
When it comes to money, as in most other aspects of life, reason and rationality are trumped by emotions and feelings.
Scientists spent decades making statements like the above, only to have it all debunked by current researchers who wanted to solve the riddle of how we could have possibly survived with such "terrible" insticts. Many things that were once believed to be evolutionary driftwood, like emotions, have turned out to be some of our most important processing machinery. It's critical to remember that any time we have experimental results that thumb their nose at the notion of evolutionary fitness, we need to stop and seriously consider what role that instinct may be serving in the current or past survival of the species. Failure to do so is simply bad science.