Pay Attention to the Man Behind the Curtain

Research in behavioral science is hard.

Self-report is notoriously unreliable; rigorous observation of actual behavior is very difficult to get right; creating comparable experimental and control groups takes more than a little ingenuity – and then you have the problem of replicable results.  Researchers who find methods that even partially steer around these known difficulties become heroes in their fields; their methods become standards, and genuine scientific knowledge can result.

But sometimes this ingenuity results in denying the obvious, and then we get silly science leading to bad theory. Some behavioral economics experiments, alas, fall into that category. They embody the Wizard of Oz fallacy: insisting that experimental subjects “Pay no attention to the man behind the curtain” when the curtain is standing open for all to see.

What people really do instead of maximizing utility

A recent research study turned up some delightful results that are both not intuitively obvious to a five-year-old, and absolutely at odds with the predicted rational utility-maximizing behavior of homo economicus.

As reported in the January 14, 2010 edition of The Economist, Tanjim Hossain of the University of Toronto and John List of the University of Chicago “… worked with the managers of a Chinese electronics factory, who were interested in exploring ways to make their employee-bonus scheme more effective … At the beginning of the week, some groups of workers were told that they would receive a bonus of 80 yuan ($12) at the end of the week if they met a given production target. Other groups were told that they had “provisionally” been awarded the same bonus, also due at the end of the week, but that they would “lose” it if their productivity fell short of the same threshold.

“Objectively these are two ways of describing the same scheme.” But as it turned out, “The fear of loss was a better motivator than the prospect of gain (which worked too, but less well). And the difference persisted over time: the results were not simply a consequence of workers’ misunderstanding of the system.”

Economics Redux

Homo economicus – that autonomous utility-maximizing creature of ancient lore – has been dead for a long, long time. Economists today drag its rotting corpse through textbooks and academic studies and econometric models in a kind of Wealth of Nations and Zombies mash-up because – well, because that’s what  economists do. It’s time and then some to give the poor creature a decent burial and a proper epitaph: “Here lies Homo Economicus: Not a Bad Start, But Fatally Flawed .”

This is hardly a new or radical observation. A quick examination of the works of Ludwig Von Mises, Murray Rothbard, Herbert Simon and Gary Becker show that both the critique of homo economicus and substantive alternatives have been around in the works of respected economic theorists for over 50 years. Behavioral economists such as Amos Tversky and Daniel Kahneman have been expanding the model of the economic person since at least the 1970’s. And as New York Times columnist David Brooks points out, the economic events of 2008-2009 “exposed the shortcomings of the whole field. Economists and financiers spent decades building ever more sophisticated models to anticipate market behavior, yet these models did not predict the financial crisis as it approached. In fact, cutting-edge financial models contributed to it by getting behavior so wrong — helping to wipe out $50 trillion in global wealth and causing untold human suffering.” (March 25, 2010)

Nasrudin’s Gold Coin

Nasrudin lost his lucky gold coin. For days he searched everywhere for it, but it was not to be found. Finally, Nasrudin fell to his knees and prayed:

“Oh Lord, I’ve lost my gold coin. I’ve  done everything I know to do, but it’s still missing. Please help me Lord. It’s my most precious possession. Help me find it, and I promise I will give half my wealth to the poor.”

Nasrudin opened his eyes. Immediately he spotted his gold coin, lying almost completely hidden under his prayer rug. Quickly Nasrudin closed his eyes again and said:

Nasrudin Loses His Keys

Late one night a friend of Nasrudin’s found him standing under a streetlight, peering anxiously at the ground. “What are you doing?” the friend asked. Nasrudin replied, “I’m looking for my keys.”

Being a good friend the man joined Nasrudin in the search. After ten fruitless minutes, the friend asked: “Nasrudin, exactly where were you standing when you dropped your keys?” Nasrudin pointed toward a dark alley. “Over there.”

Nasrudin Makes Soup

Nasrudin had some vegetables and grain; his friend had a meaty bone from a lamb roast. Together they made soup. Nasrudin got a pot and picked some herbs while his friend fetched water. After each ate his fill, another serving of the rich, hearty soup remained. Nasrudin set it aside for tomorrow.

The next day a man knocked at Nasrudin’s gate. ”I’m a friend of your friend. He said I could have his share of the soup.” Nasrudin eyed the soup wistfully, but he added enough water to stretch it to a weak but still tasty broth and they both had a portion. A bit of broth remained in the pot, which Nasrudin set aside for breakfast.

Next morning another man knocked at Nasrudin’s gate. “I’m a friend of the friend of your friend, and I’ve come for some soup.” Nasrudin took some water, heated it, poured it into a bowl, and handed it to the man. He took one sip and asked: “What’s this?”

Nasrudin Plays Golf

Nasrudin took up golf and quickly fell in love with the game. Every day he and three others met just after lunch and got in 18 holes. He returned home every afternoon, tired and happy.

But one day he returned home quite late, and his wife could see he was in a terrible mood. “Nasrudin, what happened? Didn’t you enjoy your golf game?”

Nasrudin replied: “It was just terrible! Bob teed it up on the first hole, hit a great drive right down the middle of the fairway – and keeled over, dead of a heart attack!”