Saturday, May 13, 2006

We don't know what we want

An attractive, intelligible modern economics publication is the Journal of Economic Behavior and Organisation. In two recent successive issues it has articles, Tom Sawyer and the Construction of Value (Dan Ariely, George Loewenstein & Drazen Prelec) and Honestly, why are you driving a BMW? (O. Johansson-Stenman & P. Martinsson) both of which focus on consumer tastes. These are the things that economists typically take as ‘given’ to consumers or mechanically molded by marketing.

Do we know what we like or dislike? The Tom Sawyer piece starts with the famous passage from Mark Twain’s novel Tom Sawyer where Tom has the unpleasant task of having to whitewash his aunt’s fence. Tom pretends that the task is a joy and finally gets his friends to pay him to help complete the chore. And those who do the work enjoy it! This suggests that it is not self-evident that - even a familiar activity - is pleasant or unpleasant to an individual. It is not clear that people will reliably know what they like so valuations of goods and experiences have an arbitrary component. The arbitrariness is large enough so that it cannot be assumed that voluntary trades in markets will increase individual advantage.

This is obviously true for socially obnoxious products such as cigarette products but might be also true for more ordinary goods and services as well. People might not have a pre-existing dollar value on ordinary goods and services and, indeed, might not even have a preexisting sense of whether an experience is good or bad. ‘Tom’s Law’ suggests they don’t. The paper discussed advances the proposition, based on some experiments, that experiences can be manipulated by non-normative cues such as whether agents pay to do something or have to be paid to do it. If you have to pay for it you tend (like Tom’s friends) to value it more positively. Moreover, in repeated trials people's judgments are seen to be consistent in the sense that those who were initially paid had to be paid more to gain more of the experience or, if they paid, they would pay more to consume more. An econometrician observing this behavior would assume consumers obeying the a 'law of demand' (that purchases vary negatively with price) even if people couldn’t really judge if experiences were good or bad.

Thus one gets orderly choices with systematic demand behavior even though people cannot sensibly value things. The orderly demand behavior stems from the fact that people try to not violate obvious laws of consistency but are anchored by their initial views of things. But this buries standard economic notions of how, in a market economy, preferences interact with technologies to determine what prices and outputs prevail. Now preferences might reflect the posted price of an item via an anchoring effect. Prices can prevail because of collective anchoring and accidents so that – even without market failure – free consumption choices by fully informed individuals need not maximize welfare.

We worry about our self-image. The second paper cited also proposes that people do not know their own preferences accurately and in fact need to ‘construct’ them. They do this by attaching pleasure not only to things consumed but also from the image they project to others and their self-image. People falsify their own sense of preference to obtain social acceptance and to promote their own self-image. They deceive themselves by understating the extent to which they seek the approval of others (to admit this would be to admit a nasty) – advancing self-image - and by exaggerating their signals of social responsibility promote their presentation to others.

Some of these ideas are well-known – work on positional goods that convey impressions of wealthy, competence and ability, suggests that visible goods like BMWs convey a lot of relative status value. And advertisements even appeal to self-worth - 'treat yourself - you deserve it' is a standard line. Also the warm glow effect in contingent valuation of environmental assets (using people's stated preferences to infer how they value non-marketed items) suggests people falsely over-value the environment to 'appear good'.

In a survey on car purchasing decisions the authors confirm these ideas. They find that most people consider their own concern for status when purchasing to be minor in comparison with the status concerns of others. Similarly, most individuals considered themselves to be more environmentally concerned than other people. People will therefore give the impression, in conversation, that they are much more environmentally concerned than they are. These results are consistent with an extension of the conventional theory where an individual's self-image is added to the considerations that operate when they make a purchasing decision.

These papers make me doubt basic economics ideas. They intensify my impatience with those who argue that smokers, problem gamblers and drug addicts should be left alone, to their vices, on the grounds that they are rationally maximizing their utility.


P.A. Coplay said...

While I haven't read the papers - on the basis of the summaries - are not convinced. Here are a few possible objections.

1. Anchoring effects and the like may influence consumption or stated valuations once - but are unlikely to influence patterns for goods that are consumed repeatedly. If a wine is over-priced, as long as a consumer samples multiple wines, they will purchase those offering the best value.
2. There is continuing concerns with what happens in an experiment with what happens over time in a real market. People may state in an experiment (or an a variation on point one) or even in reality that they value something more because they have paid more to rationalise disappointment - but they won't make the same mistake more than a few times!
3. Before we walk away from welfare theorems, even if there are some consumers that do behave like this, if there are enough honest (to their own preferences) consumers this will determine prices in a market (as in the standard case) and the outcome should be the same as if all consumers did so (there are similar arguments in search models)
4. If consumer choices and valuations are so easy to influence by cues etc, why is there such a high failure rate of products and firms (and such a diversity of products) If there are not persistent taste differences driven by preferences, why is there such a persistent diversity of products?

I guess introspection as well as observation makes me very reluctant to assume people don't know their own preferences and will not over time act on them (even if they don't state they do and make mistakes)

hc said...

p.a.c. Point 1`and 2 are partly rejected in the experiments but I agree that your sentiments make sense - after a while you might 'wake up to yourself'. Point 3. I agree with generally but for goods where value is hard to determine I think the theorems just don't work. For example, the commonsense notion that people are not maximising utility by smoking cigarettes seems to me to be true.

On point 4. is there that much diversity or do we tend to mimic the consumptions of others because be make similar congnitive misperceptions?

I have somer sympathy with these arguments. When I try to rationalise my own preferences to myself I come up with quite a bit of ambivalence.