Scott Sumner  

Don't assume that irrationality is hard-wired into humans

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Thoughts on the UMich Immigrat... Summers, Kotlikoff, and Mintz ...

I don't doubt that there are some types of human behavior that are both hard-wired and irrational. But it's very dangerous to simply assume that any form of irrationality that you encounter is innate (i.e. genetic). Here's the NYT:

"A good rule of thumb is we shouldn't impose a set of rules that will create moral outrage, even if that moral outrage seems stupid to economists," Mr. Thaler said. . . .

What the successful examples of variable pricing have in common is that they treat customers' desire for fairness not as some irrational rejection of economic logic to be scoffed at, but something fundamental, hard-wired into their view of the world. It is a reality that has to be respected and understood, whether you're setting the price for a highway toll, a kilowatt of power on a hot day, or a generator after a hurricane.

"If you treat people in a way they think is unfair, then it will come back and bite you," Mr. Thaler said. And it doesn't take a Nobel to understand that.


Interestingly, the same article provides evidence that this aversion to surge pricing (aka "price gouging") is not hard-wired:

When Stockholm experimented with a charge to enter the city center in 2006, it was highly controversial, with people in suburban towns especially viewing it as an unfair tax.

But since being made permanent in 2007, opinion has shifted, said Maria Borjesson, a transportation economist at the KTH Royal Institute of Technology.

"I think an important lesson is that the conception of what is fair changes," she said. "Before the charge, the discussion was of how unfair it was and how it would be hardest for low-income people. Now when we do surveys, we find that people think it is unfair if the people who use the streets and pollute and increase congestion don't pay. We've seen this everywhere that has implemented congestion charges, that public support increases afterward."


I could provide many examples of where the public has gradually become more accepting of surge pricing. Unlike when I was young, airlines now change much higher prices during busy periods. Movie theaters charge more during the evening. Hotels use surge pricing, as does Uber. Gas stations charge more after a severe hurricane hits the Gulf Coast. Groceries use surge pricing for fresh fruits.

Often our moral intuitions change over time. Life insurance was once viewed as a repulsive idea---betting on death---now it's a well established industry.

When the public holds irrational views that cause real harm to people, say on price gouging or rent controls or kidney markets or drug legalization or gay marriage, the solution is not to throw up our hands and assume that these views are hard-wired, rather we need to look for creative ways to nudge people into more sensible views of the world. That doesn't mean businesses can simply ignore these irrational views, but on the other hand don't treat them with undo respect.

Surge pricing can be phased in gradually, so that people become accustomed to the idea that a higher price for electricity on a hot day is just as sensible as a higher price for a hotel room on a holiday weekend.

My criticism of the NYT article is that it doesn't have enough focus on education. It shows much more respect for irrational views of surge pricing than it would to irrational views on race, gender or sexual preference. And yet irrational views on surge pricing do real harm to people.

Surge pricing in Singapore:

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COMMENTS (13 to date)
Garrett writes:
My criticism of the NYT article is that it doesn't have enough focus on education. It shows much more respect for irrational views of surge pricing than it would to irrational views on race, gender or sexual preference. And yet irrational views on surge pricing do real harm to people.

A point in favor of Caplan's simplistic model of Left/Right (Left is Anti-Market)?

Floccina writes:

This is an excellent point and can even be taken further, most people may be ignorant about most things but society can learn over time when those with knowledge slowly set a path that others follow.

Philo writes:

It seems that what is hard-wired into people is not certain kinds of behavior but only tendencies or inclinations or dispositions to those kinds—motivating factors that may be countered and overcome in the individual agent by other factors. Also, it is well to remember that a modicum of rationality is also hard-wired into us.

David R Henderson writes:

Excellent post, Scott.

Mark writes:

"It shows much more respect for irrational views of surge pricing than it would to irrational views on race, gender or sexual preference."
Since when does the NYT espouse rational views on race and gender?

Yaakov Schatz writes:

I agree with David. This is an excellent post. Thanks.

Scott Sumner writes:

Garrett, Yes.

David Condon writes:

It's very nearly impossible to prove that anything is definitely hard-wired or definitely not, but anything involving money would probably lean towards the not side of things since it requires understanding that there's an object which has general value due to its relation to a variety of other objects.

BC writes:

I am willing to accept that, for some businesses in some circumstances, it may make sense to avoid variable pricing to build customer trust. However, isn't that one more argument (in addition to the standard one) against laws that outlaw price gouging? If businesses already refrain from surge pricing when appropriate, then why outlaw it. Outlawing price gouging prevents businesses from implementing surge pricing when it makes sense for the standard reasons.

Second, when a firm refrains from surge pricing to avoid angering consumers, presumably it does so to maximize profits (over the long term). Then, isn't that "exploiting" consumers' irrationality? Why would we encourage that rather than educate consumers against it, i.e., shouldn't we praise firms that use surge pricing, even if doing so angers consumers, and condemn firms that refrain from surge pricing? When firms try to use advertising or other means to help consumers feel better about buying the firms' products, then behaviorialists often describe those efforts as "manipulation", especially if some behavioral anomaly is involved. So, when is avoiding "moral outrage" manipulation and when is it "treat[ing] people in a way they think is [fair]"?

mbka writes:

Scott,

Singapore road pricing is actually a great example and a living laboratory, so to speak. It's been running for a long time and it is widely accepted, with some occasional grumbling. It adapts over time of course - when average traffic speeds change, the surge hours are changed too. There is surge pricing in the public transports as well btw, and it's the "negative" kind - some timings off rush hour have recently been free of charge, to get people off rush hour trains. Maybe that's a the kind of smart nudge that overcomes gut reactions. Don't do "surge pricing" - give "lull discounts".

The biggest change is in taxis though. Singapore taxis used to be generically cheap (say, $10 for an average town trip, and fares were regulated). But you couldn't get a taxi in under 30, sometimes 45 minutes during rain, rush hour, off popular malls etc. Especially in malls, taxi waiting lines were long and call services overloaded. Now with Uber and Grab, there is massive surge pricing - to the tune of paying $30 where you used to pay $10. Magically now, you get a taxi any time in under 5 minutes. You can even pick your poison - hail the official taxi via Grab and pay regulated fare, and wait for 15 minutes. Or get the instant private hire on the same app, for 50% more. Anecdotally at least, I haven't heard anyone complain yet.

Andrew_FL writes:

But remember, refusal to accept higher real, lower nominal wages is an eternal law of nature. We don't need to understand price discovery when we can just appeal to a hydraulic model of human stubborness.

lwaaks writes:

Scott Sumner wrote:
"It [NYT] shows much more respect for irrational views of surge pricing than it would to irrational views on race, gender or sexual preference."

What counts as irrational here? For example, if you just don't like, say, white people, are you ipso facto irrational?

Ken Sinner writes:

"... undo respect"?
Undue.

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