Bryan Caplan  

Two Heuristics to Live By When You Don't Know What You're Doing

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Humility Reconsidered... Disastrous Voting...

When we see people making bad decisions - whether as consumers or voters - we often blame the "complexity" of the issues they face. If Ph.D. economists can't figure out the best mortgage to use, how can we expect the average borrower to do so? If health policy experts can't agree on how to fix the U.S. medical system, what is the typical voter to think?

But if complexity is your only demon, I've got two simple rules of thumb to exorcise him. Here goes:

1. If you don't have clear and convincing evidence that doing something is better than doing nothing, do nothing.

2. If you know that doing nothing is bad, but don't have clear and convincing evidence that one action is better than another, do the simplest, standard thing.

I frequently apply these rules to my consumption decisions. Until I'm convinced that a product will make my life better, I just don't buy it. I might enjoy a big plasma T.V., but until a seller clearly explains how he's going to painlessly install it in my house, I'm not buying one. If I do decide in favor of a plasma T.V., but remain confused about which one to buy, I'll probably just get the biggest one that CostCo carries.

In the mortgage market, similarly, my heuristics say: (a) Rent until it's clear that buying will improve your life; and (b) Get a standard 30-year fixed-rate mortgage from an established lender. Don't buy a house you might not be able to afford by signing a contract you can't explain to your friends.

Needless to say, voters could also use these heuristics to decide which policies to support. Until there's clear and convincing evidence that health-care reform or invading someone will make things better, you're better off saying No. And if you are convinced that "doing something" is better than "doing nothing," your best bet is to go with the simplest, standard option.

Admittedly, that last sentence of advice makes me a little uncomfortable. Many policies I detest - like immigration restrictions - are nevertheless simple and standard. But overall, I'm not too worried about the political consequences of my rules of thumb. If votes just learned to say No until a politician could clearly show that government action would improve the world, voters would shout down most of the policies I detest before they ever got to my second heuristic.


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COMMENTS (20 to date)

The rule I learned from my father: always buy the second cheapest option.

I understand it to be basically wary of fraud and cynical of claims to be better than anybody else.

Dain writes:

1. If you don't have clear and convincing evidence that doing something is better than doing nothing, do nothing.

For most people the "evidence" that doing something is better than doing nothing is the combination of the belief that the status quo is inadequate combined with the indignant motivation of well intentioned reformers.

Libra writes:

One of the simplest things we could do to improve our democracy would be to make passing all laws require a 90% majority. The default option should always be "no". It's amazing that a simple majority of congress can make the entire country do the economical equivalent of hopping on one leg holding their ear.

Snark writes:
But if complexity is your only demon, I've got two simple rules of thumb to exorcise him.

If complexity is a demon, it's most assuredley female.

Lord writes:

Borrowing shouldn't be much the consideration of the consumer at all. The lender bears a much higher responsibility.

The result of this policy is to lead to crisis, which is already about the only way anything gets done anyway. So you are saying we can't improve on how we operate?

heckler writes:

unbelievably insightful yet understandable to the little people.

great job, as per usual, bryan!

Jonathan writes:

I agree with the post, but not its premise.

I really feel like, and perhaps this is naivety, that there is not a choice in consumption that lies outside the purview of what I am capable of understanding.

If I don't understand what I need, do I really need it?

guy in a veal calf office writes:

A consumer lifestyle that requires convincing for any addition seems impoverished and unimaginative. Financial decisions made based on default knowledge seems silly when you can just do a little thinking (i.e., if you plan to live in that house for 15 or fewer years and can find investments that return rates greater than mortgage interest (minus tax deduction), you should learn about 15-year interest only ARMS).

And if you accept that each of those choices require more thought and exploration than your simple system is not very simple and resembles most people's normal approach to things.

Troy Camplin writes:

That's the heuristic I used when I bought my house. Also, my parents told me that if the interest rates were very high, get a variable rate, but if they are low, get a fixed-rate. Needless to say, I bought my house a year and a half ago, and got a 30-year fixed rate mortgage. I don't feel sorry for anyone who got a variable rate mortgage when the interest rates were as low as they were. That's a pretty high level of stupid.

Tracy W writes:

If complexity is a demon, it's most assuredley female.

It was men who invented cricket. And baseball.

Paul writes:

I think these rules of thumb work very well in the climate debate context. There's no clear convincing evidence that doing something is better than doing nothing and if you're convinced that we should do something a simple tax, rather than complex cap-and-trade, seems to be the ticket.

eccdogg writes:

I would add one or two others.

Even if you think that you have clear and convincing evidince. Try a small toe in the water approach first. You will learn things about a complex system that you could not have foreseen at the outset.

And similarly, don't put all of your eggs in one basked if possible. YOu may find that the corse of action you were convinced was best is worse than s somewhat different corse. Unless you try both you will never resolve the uncertainty and comlexity inherent in a new untested decision.

manuelg writes:

> Many policies I detest - like immigration restrictions - are nevertheless simple and standard.

Slavery was "simple" and "standard", for a time. Since continuing the practice needed the South to be victorious against the Northern aggressors/liberators in a civil war, lets agree to call it "difficult in practice".

I would call "immigration restrictions", not simple, but "difficult to enforce, in the United States". Businesses desire workers willing to take undesirable jobs at low wages, and who have limited sense and means of entitlement in the workplace. Illegal immigrants want wages they could not hope to receive in their birth nations. Consumers have demonstrated no great ability to tolerate the price hikes and unavailability of services that would take place if businesses were meaningfully restricted from hiring illegals.

It may be "simple", but not "easy".

I like the Navy Seal's CARVER matrix, for effectively prioritizing objectives under conditions of greatly constrained resources and woefully incomplete intelligence and analysis. There are six reasons for doing something (ahead of something else - it is a relative score - a prioritizing tool).

CARVER stands for CRITICALITY, ACCESSIBILITY, RECUPERABILITY, VULNERABILITY, EFFECT, RECOGNIZABILITY.

* Simple to Understand, no chance of confusion during the action (RECOGNIZABILITY)

* Easy to Complete (VULNERABILITY)

* Can begin now - few or zero prerequisites to actions (ACCESSIBILITY)

* Urgent - Maximum benefit arises from completing quickly (EFFECT, in a military/adversarial context, this would include debilitation of the enemy today that will allow greater chance of successful strikes in the future)

* Important - key to attaining highest goals or securing highest values (CRITICALITY)

* Quick Payoff - total effort will be repaid in shortest amount of time (RECUPERABILITY, in a military/adversarial context, you may also consider the inverse of this, making the enemy require a lengthy recovery time)

mjh writes:
If votes just learned to say No until a politician could clearly show that government action would improve the world, voters would shout down most of the policies
You really think so? I think voters may already follow your heuristic. The problem is that they are too easily convinced that an action will improve the world - they only look at their part of the world that will be improved.
Lord writes:

I would go even farther. As easy as it is to find fault with government policies, I am not sure that in finding a majority to support them, they are not in fact the best that could be hoped for. But than that may just be more best of all possible worlds thinking.

Ben Kalafut writes:

I know Mr. Caplan is no democrat, but suppose voters applied this to how they reward politicians. Given that the plebs might simply never understand problems that require a certain amont of technical capability to understand, for example ozone depletion, ocean acidification, or anthropogenic global warming, this would be a recipe for disaster.

Joseph writes:

Heuristics? Horse-hockey! The only rational option is to use optimal search theory. Then you make your choice given that specific probability distribution of all possible outcomes.

Chris Yeh writes:

It's human nature to want to act, no matter how irrational. We instinctively want to "fix" things that are broken, and the emotional pressure to "do something" builds up to unbearable levels, even when it's pretty much impossible to chart a course of action that actually helps the situation.

The New Deal, for example, was terrible in terms of economics, and probably had no positive effects. But because FDR was *doing something*, people felt better.

I work with a lot of young people are always eager to "do something" whenever the business doesn't behave the way they think it should. They don't like it when I explain fluctuations in key metrics as "Brownian motion." But if I let them go off half-cocked every time they wanted to "do something," I'd be putting them on the bullet train to exhaustion and bankruptcy.

Troy Camplin writes:

I think that if we help politicians personally liable for the negative outcomes of the laws they voted for, that would be a strong motivator to do the right thing (and avoid doing the wrong thing, which is what 99% of all laws do).

ColtsFan writes:
Admittedly, that last sentence of advice makes me a little uncomfortable. Many policies I detest - like immigration restrictions - are nevertheless simple and standard.

Illegal immigration is the quickest way to the establishment of Socialized medicine and left wing economics in the USA.

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