Who gets to judge our decisions?

Back in my high-school years I was all into STEM (Science, Technology, Engineering and Mathematics) and did not care much for the social sciences. I understood that Politics was bound to have an effect in my life, but things like Sociology or Economics fell completely out of my field of interest. Luckily (or at least so I think) things have changed over time and now I am an avid consumer of the latest in the branch. In particular, I enjoy listening to the Freakonomics podcast, even if their thesis are often too market-oriented for my taste, because I find their thought process and their method of inquiry fascinating.

A few months back I listened to an especial live episode in collaboration with the Character Lab foundation where they discussed the findings of several studies conducted by the foundation over the course of the previous year in an effort to help people to make better decisions. But what is the measuring stick to determine which decisions are better than others?

The field of Economics was stuck as a pure formal science with essentially no link to reality. The formulation of their laws was loosely based on observations, but there was no method to quantify them. If we take the law of diminishing returns, it is clear that getting an orange is, in most case, a win for the recipient, either for their own consumption or as an object for barter. Getting a second orange probably depletes the benefit of the orange as food, but it is essentially twice as valuable for exchange as just one. However, it is obvious that the second orange provides less returns than the first, and the trend extends upwards. By the time you get ten oranges, they start to become a problem to transport (you will need a bag) and if you get 100 oranges you will probably have to put money from your pocket to buy a cartwheel and be able to make use of them (negative return). So it is clear that the returns diminish, but there has not been any clear formulation as to how fast the returns decrease or when they become negative, because this point will be different for a grocer, who has the infrastructure to sell them, than for another person, who can only eat them or trade them.

Similarly, the economic model for decision making has long been touted as useless, because its cost-benefit analysis is so far from the way actual people make their decisions that it has been given its own name: the Homo Economicus, or Econ for short. And the criticism has a point, because in the modern world, where children are not useful as farm hands anymore, if does not make "economic sense" to have children. In exchange, economists have long despised us mere mortals as "irrational", failing to observe that they are human themselves and suffer from the same shortcomings of judgment as the rest of us.

Drawing: Kurzon

Trying to breech the gap, economists have joined forces with behavioral scientists to reconcile "irrational" decision-making and forge the new field of behavioral economics.In the episode I mentioned above Angela Duckworth and Katie Milkman reported on the progress of their Behavioral Change for Good Initiative, and there was a point where I disagreed most openly: Justin Sydnor, from the University of Wisconsin Business School found irrational that an employee would pay a more expensive health insurance, that would cost them 60$ more per month, when in all likelihood they were not going to use the additional benefits, so they could put that extra money in a jar and be 720$ richer at the end of year. And I, on the contrary, find it most rational: if an employee knows that they are not going to be able to leave the money jar alone (there are always emergencies popping up) and that they can give up 60$ every month but they cannot choke up 720$ if ever they need it, it is the most rational decision to accept the bearable to avoid the unbearable. Under these circumstances I find the decision most rational. This reminds me of the Frog and Scorpion fable, where the frog dies because of the voluntarism delusion that the scorpion can overcome its nature if it just "wants to".

One might consider if taking money out of the jar is irrational, but we can think the case in reverse: imagine someone has 720$ in a jar and runs into an emergency expense (e.g. the car breaks down) for 500$. Is it more rational to dig into the jar, and be 500$ poorer or put it on your credit card to preserve the pot and end up paying 600$ instead?

Similar criticism has been exerted over lottery players, most of which are far from being well-off, and yet spend on a regular basis small sums with a very slim chance of payback. But the rationale is the same: they could save 5$ per week and end up with 250$ at the end of the year, but that sum will not take them anywhere higher up the ladder. On the other hand, giving up 5$ per week (I do not consider here compulsive players) does not make them much worse off, but it gives them a chance to come by a life-changing sum of money.

I will leave you with the thought today that, when judging someone else's decisions we often oversee their circumstances, present and past, their feelings, fears, capabilities, or just their state of mind. And all these factors can change the decision process dramatically. Enjoy the weekend.