Bryan Caplan  

The Law of Inflated Expectations

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Do you want to know the clearest sign that someone is a bad driver?  If they think everyone else is a bad driver.  Why do these people imagine that everyone else is a bad driver?  Because they have unreasonably high expectations about the kind of treatment other people owe them.  The clash between their inflated expectations and reality is the cause of their bitterness.

When people scoff at the power of reputation to constrain business behavior, they're basically making the same mistake.  If you think that paying the standard market rate entitles you to top-of-the-line quality, businesses will constantly disappoint you.  I call this the Law of Inflated Expectations: The main cause of cynicism about business is consumer narcissism.

A more reasonable stance: When you offer a business mediocre compensation, you should expect and be satisfied by mediocre quality.  If you hire a random contractor out of the phone book, don't expect him to be anything special.  If you buy a one-year health insurance policy, then get chronically ill, don't expect the insurer to eagerly renew his policy for the original low price.  He's not throwing you under the bus; he's giving you what you paid for.

In other words, "You buy cheap, you get cheap," and "Reputation matters a lot" are perfectly compatible.  Every firm wants a reputation for more-or-less keeping its promises.  Only a few firms seriously try to make people say they're "the best."  Why would anyone expect more?


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TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/2160
The author at Corrupt.org: Remaking Modern Society in a related article titled The Frustrated writes:
    Bryan Caplan writes: Do you want to know the clearest sign that someone is a bad driver? If they think everyone else is a bad driver. Why do these people imagine that everyone else is a bad driver? Because they have unreasonably high expectations about [Tracked on August 13, 2009 4:04 AM]
COMMENTS (21 to date)
mark writes:

Well, since so much media is free to the consumer, the modern American experience is actually more complex than this argument. Also many other generally satisfactory aspects of American life appear free to the immediate consumer, such as most roads, public education, etc. At the other end of the spectrum, such as CEOs, movie stars, and professional athletes, one often encounters facts that run contrary to this argument.

TomB writes:

Sentence two should read: They have Maryland license plates.

Seriously though, it seems that people believe that medical care should be distributed equally. Or that all health insurance plans should cover all mandatory/non-voluntary treatments.

I think the plan described in the John Mackey article that Prof. Kling linked to would help set consumer expectations more appropriately.

Eric H writes:

You make a great point. Our rational ignorance as consumers blinds us to the realities of production.

I think your driving analogy would be more apt if we were driving on private, rather than public, roads.

Dan Weber writes:

If you buy a one-year health insurance policy, then get chronically ill, don't expect the insurer to eagerly renew his policy for the original low price.

Bryan, do you have any idea what the individual insurance market is like?

Can you name one company that offers multi-year contracts to individuals in any state? (I'd really like to find it for North Carolina, but last time I shopped I couldn't find anyone guaranteeing their rates for any more than 12 months. For life insurance, they practically beg you to lock in for multiyear contracts.)

SydB writes:

I'm with Dan Weber. Does Kaplan know anything about buying private health insurance plans? Can he provide some details. When I went looking for health insurance for my family, I didn't see a plethora of options.

matt writes:

I like to think I have slightly more rational expectations of the companies I work with. I expect the cable company to treat me poorly because they have a monopoly.
I expect my phone company to treat me poorly (but better than the cable company) because they are part of an oligopoly.
I expect my car insurance company to treat me well because it is part of a much more dynamic and competitive market.
I expect my health insurance company to avoid covering people who are sick, because that's not insurance, they are already sick. There are many ways to reform health-care spending that deal with this specific problem, I have seen you on this very blog suggest ways, premium insurance etc... Pretending that this problem doesn't exist and is part of some absurd narcissistic behavior on the part of consumers is foolish.

I don't care about covering poor people, and universal insurance. But as young guy with a family who is not rich enough to deal with a major illness. I worry that if I get sick I can't work, I won't be able to keep my insurance, and my pre-existing condition will ensure that I can't get new useful coverage. Also it takes 2 years to get on Medicaid/disability, so that really doesn't help. These are the problems I want to solve. Republicans ignore these problems at your electoral peril. Working people want to feel secure, and as Americans we have no problems with inequality. I am pretty conservative but I like unemployment insurance, and think its fare its not welfare. Health reform that deals with middle-class working people's insecurity need not be a liberal program

Colin k writes:

Most products sell to a very wide range of consumer incomes. To some people, a Honda is a low price alternative to a Benz or Lexus. To others, a new imported car is a major luxury. The step-down buyer may be used to a high standard of service but the "reach" customer may think of a mediocre product as being high-end to him.

El Presidente writes:

Bryan,

That's fine as long as there are no objective standards. Once we introduce objective standards, many people (firms) may very well be bad drivers (disreputable), and pointing it out doesn't necessarily make the police officer (regulator or policymaker) a bad driver (malcontent) too.

But, if we are staying in the realm of subjectivity, then I completely understand and agree with your sentiment that people whose expectations are consistently at odds with outcomes are probably outliers. Which side of the mean they fall on depends upon the nature of their deviation. There might be people who are always pleasantly surprised with what they receive. They might be just as aberrant as their opposite counterparts. Do we complain that they expect too little?

Russell writes:

The logic here seems quite circular...if you pay for something and are disappointed by what you receive, well then, you are just a narcissist.

There also seems to be an implication that an individual human being's reputation works exactly like that of a company. This is clearly wrong - AIG has no feelings, no wife, no dog.

I think there is some good insight embedded here but would like to see the relative/absolute issues fleshed out and dealt with a bit more.

Max M writes:

Then again, it may be that we actually live in a place where other people are, on average, really are bad drivers. I think Phily is #1 for "Bad Drivers" in general, Miami is #1 for "Road Rage", etc.

http://query.nytimes.com/gst/fullpage.html?res=9E06E6D71031F93BA25755C0A9609C8B63

http://www.msnbc.msn.com/id/18665115/

Sprinkle in some over-generalization bias and you've got your cocktail for "Everyone else is a REALLY bad driver".

Doug T writes:

Raise your hand if you're an above average driver....

SydB writes:

Actually, this whole post seems over the top hyperbolic.

"Do you want to know the clearest sign that someone is a bad driver? If they think everyone else is a bad driver. Why do these people imagine that everyone else is a bad driver? Because they have unreasonably high expectations about the kind of treatment other people owe them. The clash between their inflated expectations and reality is the cause of their bitterness.


Really? The "clearest sign?" Maybe the clearest sign is an accident and violation record.

SydB writes:

"buy a one-year health insurance policy"

It could be Mr Kaplan confuses health insurance with life insurance. Most private health insurance is payed on a quarterly basis and I'm not familiar at all with anything other than this.

Perhaps he has alternative that can be shared with us.

RL writes:

Bryan writes: "Do you want to know the clearest sign that someone is a bad driver? If they think everyone else is a bad driver. Why do these people imagine that everyone else is a bad driver? Because they have unreasonably high expectations about the kind of treatment other people owe them. The clash between their inflated expectations and reality is the cause of their bitterness."

But couldn't he as easily have written: "Do you want to know the clearest sign that someone is a GOOD driver? If they think everyone else is a bad driver. Why do these people imagine that everyone else is a bad driver? Because they have unreasonably high expectations about the kind of treatment THEY owe OTHER PEOPLE. AND THEY WORK HARD TO MEET THESE HIGH EXPECTATIONS AND ARE FRUSTRATED SO MANY OTHERS DO NOT. The clash between their inflated expectations and reality is the cause of their bitterness.

Why is Bryan's hypothesis more empirically persuasive?

Matt C writes:

I think you've lowered the bar a bit.

In a previous post you were talking about the insurance industry as a whole, and implied that reputation was enough to police all the firms in the insurance industry.

I wonder why it is that health insurance companies don't try harder to improve their reputation. (You're looking pretty bad when even EconLog readers are mostly running you down.)

Gary writes:

I'm not necessarily in tune with all of Bryan's logic in this post (ala RL), but I agree that a lot of criticism of health insurance companies amounts to: "I wish they would give me something neither of us agreed to in the contract."

I like it when companies give me free stuff, too, but I've never felt I had a moral case against a company that declined to give me charity.

Kurbla writes:

Reputation is investment. You treat your customers fair, and you get the reputation. Now, what happens when you want to pull the capital from company. The companies have reputation, but capital hasn't. It is "rational" to start selling reputation, mistreating customers - so at the moment you close the doors you end with as little reputation and as much money you can.

But it is true only for losers, right? Well, if your favourite company is not destined to stay forever, it is only matter of time they'll start to sell their reputation.

:-)

hacs writes:

It's always the same ideological message: the equilibrium under competition is the best, even though in the real world there may be countless imperfections and frictions, and, probably, structural unawareness about the human decision mechanism, consequently, as the markets operate. If those conditions are true, how can someone guarantee that unregulated markets would achieve a socially stable equilibrium (I am not talking about satiation)? That theory is inexistent, and any statement in favor of unregulated markets is postmodern art, not science (socialism is not a solution, I know). In fact, the law of inflated expectations is an axiomatic form of to face symptoms of social instability.

Patrick C writes:

Bryan - you lost me in the first paragraph. Pure gibberish.

anders bagge writes:

the comparison with driving skills is not consistent with the point you are trying to make. when i hire a professional it's because requiring the skills, buying the tools etc. in order to do it myself, is too expensive in time, effort, and money. as the counterpart in the transaction it is my right to have the other agent fulfill their promises. of course i shouldn't expect any icing on top if i haven't paid for it, but he should get the job done according to the contract. if the professional does not deliver the service i hired him for, is my expectation inflated? of course not, i am entitled to complain and get compensated. and seriously, in marketing, how many service providers say that they are mediocre? and with that comment i'm done reading this blog. if you, as a scientist are going to keep any credibilty while being as political as you are, you must sharpen your arguments. otherwise you lose both political and academic relevance.

Eric H writes:

After thinking this over for a few days, I've come to believe that inflated expectations are a rational means for some consumers to extend the bargaining period past the point of purchase.

For example, I have seen purchasing agents in the private-non-profit sector use their inflated expectations to get more out of lowest-bid contractors after work has been done. Bryan's point is that these agents should be realistic: they wanted the lowest bidder to do the work, they should accept the consequences. Their behavior looks even more irrational when you factor in the actual cost of bargaining to the agent's employer; accepting the lowest bid doesn't make sense if you're going to pile on the cost of mis-directed management time and skill.

In these admittedly anecdotal situations, I have even heard managers say things like "They are the lowest bidder; but it is what it is," and then turn around and press that contractor to improve his work after the fact. In most cases, the contractor acquiesces, at least until they've consumed a certain percentage of their profit margin.

What would seem to be missing in most cases is a clear understanding by both parties of what is to be done and how, though I have seen this situation repeated even when there are detailed, formal contracts in place.

Perhaps both consumers and producers use inflated expectations to game the system; maybe "in the long run" they are both betting that an informal extension of bargaining past the point of purchase will lead them both to gain.

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