Economists are finally acknowledging that humans are not fully rational. Squirrels in our back yard are grinding that home to me, but somehow I don’t appreciate the lesson.
For more than two centuries, economists began their theorizing by asking: What would a rational person do in this situation? Only in the past decade have they begun to wrestle with more complex situations faced when one abandons such assumptions of complete rationality.
My situation shows how values people place on things are not always symmetrical. Squirrels, chipmunks and birds have been raiding our cherry tree, the jewel of our small orchard. It was full of blooms this spring and loaded with cherries by May. Visions of jelly and fresh cherry pie danced in our heads.
But as the cherries ripened, all manner of fauna began to enjoy the fruit. We placed nets and sprinkled fox urine and other noxious substances around the tree. But every day the losses mounted.
If it simply had been a poor year for cherries, I would not have been upset. But having seen the bounty ripening before my eyes, the sight of a fat squirrel scampering away from the cherry tree arouses rage fantasies of rodent genocide. Losing something that was almost within my grasp was more painful than if I had no cherries to look forward to.
Experiments by economists and psychologists show similar asymmetry. Offer someone something worth $500. Ask if they would be willing to pay that much to have the object. If they say no, ask what they would do if they had been given the object and then had a chance to sell it for $500. Many respond that they would not sell it for that amount.
That seems irrational. If you would prefer $500 cash to some object when contemplating its purchase, why would you not prefer cash when you have it and are offered the opportunity to sell? But the phenomenon is common.
Most game show contestants would not pay $25,000 for the sporty little convertible offered as a prize. If given that much in cash, they would choose to spend it on other things. But when they win the car, they want to keep it, even if they could sell it for the nominal value.
This unbalanced valuation has implications for esoteric theorizing about human behavior, but it also affects history. Historians have long noted that oppressed peoples do not revolt when their lives are most miserable. They are more likely to rise up when things are getting better but when the improvement is threatened.
Such “revolutions of rising expectations” were a staple theme in 1960s thinking about economic development in Latin America and elsewhere. It was important in counterinsurgency strategies back then and is again today.
Asymmetric valuations are just one topic in the new economics of partial rationality. But the field as a whole will liberate the discipline from intellectual straitjackets of the past. Humans are complex and quirky. We will understand economic behavior only when we acknowledge that fact.
2007 Edward Lotterman
Chanarambie Consulting, Inc.