Incentives and tricks

"But what Sunstein and Thaler say is that it's just easier to trick people than it is to change their incentives.... [M]y toolkit used to contain only incentives, but now tricks are in there, too."
Steven D Levitt, from an interview in Simon W, Bowmaker, The Art and Practice of Economics Research: Lessons from Leading Minds (Edward Elgar, 2012 ISBN: 978 1849808460) p. 237

Behavioral economics and the psychologists who inspired it may have introduced ways of tricking people into intellectual discourse but it is doubtful that they are discovering anything that has not been practiced by hucksters for generations. Their analysis of weaknesses in the ways people choose can be used in two ways.

First, it can help people manipulate others--to trick or nudge them. This can benefit those who are tricked if, as Levitt, Thaler, and Sunstein assume, the tricker is a benevolent paternalist preventing mistakes by an error-prone citizen or underling. Those who assume that even people in government are usually self-interested fear that the benefitting party will not be the one tricked, but rather the one who tricks. They worry that power combined with this knowledge creates temptation for abuse.

The second way to use the analysis of behavioral economics is not through manipulation but rather as a defense against manipulation.  If one understands the errors to which human decision-making is prone and how those errors can be exploited by others, one can attempt to correct for those errors and is less likely to be exploited.

Thaler and Sunstein do not use the word "trick." Instead they talk about "nudges," ways of framing choices so that people are more likely to make what Thaler and Sunstein consider good choices. Levitt has re-framed their message by using the word "trick," and their approach seems less desirable when it is seen as tricking people rather an as nudging them. Can the government of free and equal people be based on deception?

(Behavioral economics can be used to attack the notion of market efficiency. If people cannot be trusted to make rational choices, why should we want a system to responds to people's wants as markets tend to do? However, behavioral economics can just as easily be used to attack the underpinnings of democracy. If people can be easily tricked, why should we expect their political choices to result in good government? With or without behavioral economics, it is hard to make a convincing case that political processes have a greater tendency to self-correct than market processes.)

Payday loans for rich people?

When I saw this ad for J.D. Wentworth a few days ago, my instantaneous reaction was, "Payday loans for rich people." That certainly is not the reaction that the people who made the ad wanted. An important reason for choosing opera as a way of getting their message out is that opera is considered high-class, and they want to be the association of high-class opera to color people's views of their company.

The service they are offering is the same service as payday loans--to restructure payments. People who use payday loans need money now but do not get paid until later. The same is true of the people whom J.D. Wentworth is targeting, though the payments are over a much longer period of time and are much bigger. Their appeal is to people who have structured payments over time, the sort of payments that lotteries, annuities, and some legal settlements give. If you have a certain income stream of $2000 per month and you want to cash it in, firms like J.G. Wentworth are there to help you out.

Are they socially useful? The argument that they are is the same argument that payday loans are socially useful. If people are rational, we should trust that they know what is best for themselves. J.D. Wentworth has testimonials on its website emphasizing how useful it can be to restructure payments. The argument that they are not socially useful is that many people think only short-term and will do things for immediate gratification even though the long-run consequences are disastrous. This position would argue that J.D. Wentworth is preying on those who have self-control problems or are compulsive spenders.

(They have a somewhat different ad that still has the music but a different setting.)

Pornography

Is pornography addictive? This piece suggests that it is and that it has serious consequences for third parties.

Imagine a drug so powerful it can destroy a family simply by distorting a man’s perception of his wife. Picture an addiction so lethal it has the potential to render an entire generation incapable of forming lasting marriages and so widespread that it produces more annual revenue — $97 billion worldwide in 2006 — than all of the leading technology companies combined. Consider a narcotic so insidious that it evades serious scientific study and legislative action for decades, thriving instead under the ever-expanding banner of the First Amendment.

Pornography deserves a second look from economics. The libertarians have tended to treat it as a private matter, and argue that there is no disputing tastes. However, as a compulsion or addition it would be interesting from the point of view of behavioral economics. And if we recognize that it has externalities, mainstream public finance has a lot to say about it. I have been wondering if the enthusiasm many economists have for the global warming scare is not in large part due to the fact that they see it as an externality problem, and economists know how to fix externality problems.

Trial by ordeal

At boston.com (part of the Boston Globe?) economist Peter Leesen makes the case for trial by ordeal:

Modern observers have roundly condemned ordeals for being cruel and arbitrary. Ordeals seem to reflect everything that was wrong with the Dark Ages. They’re an icon of medieval barbarism and backwardness.

But a closer look suggests something very different: The ordeal system worked surprisingly well. It accurately determined who was guilty and who was innocent, sorting genuine criminals from those who had been wrongly accused. Stranger still, the ordeal system suggests that pervasive superstition can be good for society. Medieval legal systems leveraged citizens’ superstitious beliefs through ordeals, making it possible to secure criminal justice where it would have otherwise been impossible to do so. Some superstitions, at least, may evolve and persist for a good reason: They help us accomplish goals we couldn’t otherwise accomplish, or accomplish them more cheaply.

The system of trial by ordeal was undermined by the Church:

In the early 13th century, Pope Innocent III spearheaded a damning denunciation of ordeals on the grounds that ordeals were antithetical to Christian doctrine. His edict banned priests from further involvement with them. The Church’s condemnation of ordeals seriously undermined the superstition on which ordeals relied. If ordeals were antithetical to Christianity, how could God reveal defendants’ guilt or innocence through trials of fire and water?

 I am not surprised that an economist wrote this because behavioral economics emphasizes the placebo effect, or power of expectations to shape our perceptions the world. However, Leesen is engaging in speculation. We do not know how effective trial by ordeal was and there is no way to find out. We also do not know how effective our current criminal justice system is and there is no way to find out. What percentage of those who are found guilty are actually innocent? How many people who are guilty are never punished? No one knows. It is quite possible that trial by ordeal was a more effective system of justice than our system. And like the system of trial by ordeal, our system depends on confidence, the belief of citizens that the system works. If people lose confidence in our system, it too will become less effective.

Leesen seems to be too careless with the word "superstition." Is belief in God superstition? If we want to use the term that loosely, then there are a great many things that are superstitious, including most or all of what we believe.

Update: One the difficulty of computing the number of innocents who have been convicted, see here.

Return of Layaway

More people are buying Christmas gifts using layaway, a method of making several small payments to accumulate a large sum. Layaway payments do not make sense in the world of rational economics, but they do make sense in the world of behavioral economics.