home > archive > 2018 > this article

Loading

Relevant irrelevance

By Nathanael Costa
web posted September 17, 2018

When I used to receive an allowance from my parents, I always enjoyed trading out two smaller bills for a larger one from one of my siblings.  There was of course no actual change in the amount of money I had, but the novelty of the larger bill made it seem so much better.  In a similar vein, my sister used to hate it when my mom cut up her food for her, because it seemed to her that there was now more food on the plate.  While these are simply amusing stories about the way children act, how we view things can have a large impact on the actions we take, even into adulthood.  In fact, as shown by economist Richard H. Thaler, these ‘irrelevant’ ideas actually make a difference with how we act regarding our money. 

In an 2015 article he published in the New York Times, entitled, “Unless You Are Spock, Irrelevant Things Matter in Economic Behavior”, he gives the example of something that happened in a class that he taught.  He gave out a midterm exam and the results came back with an average grade of 72 out of 100 in the class.  Thaler curved the exam, but the students were still upset at how apparently low their scores were.  Determined to solve this issue, he gave out his next exam with a possible score of 137.  This time, the average grade was a 96 out of 137 (70%).  Even though his students had done worse on average during that exam, they were much happier.  He went on to argue that this is irrational, and thus economists are not often expecting this sort of behavior.  However, if economists want to be well informed in their view of the world, they ought to take these sorts of things into account.

Thaler goes on to argue that the way economists traditionally view the world is by assuming humans are practically robots (hence the title of his article, “Unless You Are Spock…”) who act out of their own desires (our own self-interest, according to our Principles of Economics textbook 1.2).  They often fail to consider the assumed irrelevant factors that play a part in people’s lives.  He gives the example of retirement plans – even though robots could plan for retirement without difficulty, people still struggle making those decisions; employers recognize this factor and give their employees various retirement aids.  This makes intuitive sense.  Another example he gives is the difference between receiving a tax cut from the government in the form of a lump sum, or a series of smaller payments.  Robots would act the same regardless of the way in which the money was given to them, but people tend to spend money much faster if it is given to them as a lump sum.

In general, I agree with what Thaler argues for in this article.  A lot of what he’s saying would actually fall more under the topic of psychology than economics, but it applies regardless.  I have considered minoring in marketing in college, and a lot of the same principles are in play there as well.  Even if the product you are trying to sell isn’t necessarily that much better than the product the consumer has, the way they feel about it can have a large impact on their decision to purchase it.  People want to feel like they have something new, or big, or exclusive.  The same wish affects how people view their economic situation.

Thus, Richard Thaler contends that supposedly irrelevant factors (SIFs) actually affect the way that humans interact with money and economics in general.  Unlike Vulcans, our feelings in a particular situation have a noticeable effect on the way we function.  Whether it be the desire for something different or wanting a sum of money all at once, our desires have an impact on our decisions.  Intuitively, this follows from what we know about the psychology of the human mind.  Thaler rightly argues, then, that an informed economist ought to take this information into account when modeling our world. ESR

This is Nathanael Costa’s first contribution to Enter Stage Right. He is currently studying AP Macroeconomics in high school. © 2018 Nathanael Costa

Home


 

Home

Site Map

E-mail ESR

 

 


© 1996-2018, Enter Stage Right and/or its creators. All rights reserved.