Why we are stupid with money and will never learn any better. Not even from three-card monte (those bastards).
January 29, 2002 5:20 PM   Subscribe

Why we are stupid with money and will never learn any better. Not even from three-card monte (those bastards). "I'll trade you this two hundred dollars for that banana." "Done and done."
posted by hellinskira (13 comments total) 1 user marked this as a favorite
I'd buy this post for a dollar!
posted by fuq at 6:40 PM on January 29, 2002

Leave it to the economists to come up with ridiculously oversimplified models of human behavior, and then criticize people for not conforming to them.

Fascinating article, though.
posted by electro at 6:50 PM on January 29, 2002

Excellent link, hellinskira. Keep up the good posts!
posted by hitsman at 8:42 PM on January 29, 2002

the author is an idiot.

i'm not an economist, but there's no way this article even remotely supports his point. he makes several misleading, irrational comparisons which amount only to meaningless hand waving. he completely muddles the concepts of value and worth, and the only way his idea can succeed is through complete ignorance of his example subjects.

Example. a 50% discount and a 1.3% discount are vastly different even if they both equal $10. it's a question of value and need, not numerical equality. yeah, i could go across town to save the same ten bucks, but a) it's not as good a deal, b) i may not need a chair, and c) i probably don't have a spare $750.

Example. Just because a trader sells on the up and not on the down may reflect excellent judgement, rather than total irrationality. That trader may in fact be basing his actions on the analysis of future performance.

Fine, the economic phenomena (e.g. compromise, endowment, etc) are somewhat interesting, but they're hypothetical explanations of why they occur are spurious. furthermore, the phenomena definitely don't prove humans irrational. most of the phenomena are completely dispelled by an even vague notion of product worth/value.

in the "experiments," people have trouble guessing proper value because they have no frame of reference. if they knew what ten other similar products cost, they would be able to nail down market value and could then attempt to assign a proper cost.

Example. I have product X which is valuable to me but I want to sell. I can only guess at how valuable it is to others, and thus can only assign a totally arbitrary price. Only by being aware of the market forces could I know what offer price was reasonable.

argh. there are so many things about this article that offend me i could go on for pages.
posted by syn at 8:44 PM on January 29, 2002

"While such insights may be revolutionizing economics, they are hardly news to marketers and pitchmen."

That about sums up what's wrong with current economic theory. Extrapolate to deregulation, privatization, corporatization, share-squeezing[1], and the inevitable Enron debacle.

Capitalism and free market theory was originally based on the concept of making a business out of what one is presently able to do (a 1st-order business). This is a Good Thing. It was a little skewed, but generally improved, by the concept of learning new skills so as to have a better business, which will fill currently unmet needs. The downsides of this are rushes, shortages, and other kinds of chaos, but on the whole society could not progress without this concept. These are 2nd-order businesses.

Working for somebody else can be classified as a 1st or 2nd order business, along the same lines; either use the skills you have (randomly) acquired to earn an income, or assess what kind of skills you need to gain to get an income. Education itself is a 2nd-order business.

The next step is the one that causes problems. This is where people want to have the best possible business, which, pretty obviously, is a business that sells its product or service at the maximum price that the most customers will pay, and costs the minimum possible for the business to create. Examples: the McDonalds franchising system. Day trading. Consultancy. Spamming. Becoming CEOs and directors. These are all 3rd-order businesses.

The problem is not confined to these self-maximisers (calling them "greedy" is no more correct than calling everyone else "lazy"). It feeds back outwards into the broader society: why should a person establish a 1st or 2nd-order business, when it is possible to have more money and less effort with a 3rd-order business? 1st and 2nd-order businesses, which produce necessary good and services, suffer in comparison. Shortages arise, but it is the 3rd-order businesses which are filling these needs on their preferred terms: maximum possible profit.


[1] Share-squeezing works like this. Person A works for Company A and has shares in Company B. Person B works for Company B and has shares in Company A. As shareholders, these people each demand the maximum possible profit from the company they have invested in. Thus they threaten each others' jobs and working conditions. Extrapolate this to more people and companies.

Possible solution: Share ownership is gambling and should be treated as such. You don't have "bettor's meetings" and sue the trainer or the bookie when your horse loses a race, do you? You're not entitled to be involved in the day-to-day training of the horse either, just because you want to bet on it. Nobody forced you to buy shares in Blah Company, you did so because you wanted to sell them at a higher price later, presumably to some sucker, who will make less profit than yourself. The idea of shareholders having any rights, other than ensuring that the business being "invested in" actually exists, is flawed.
posted by aeschenkarnos at 8:48 PM on January 29, 2002

I considered posting this earlier, too (it was on aldaily) but I also got annoyed with the oversimplification - some of it's interesting, but some of it didn't make sense. I mean, selling when your stocks go up is the idea! That's what you're trying to do - invest some money and sell when you've made some. If they go down, you're meant to hold out through the rough spot etc.
posted by mdn at 9:27 PM on January 29, 2002

In both cases, the subjects were presented with essentially the same simple question: Would you want to spend $10 to see the play? That's largely the way the cash-losing group thought of it, with 88 percent opting to buy the ticket. But the ticket losers, focusing on sunk costs, tended to frame the question in a different way: Am I willing to spend $20 to see a $10 play? Only 46 percent said yes.

This idea fascinates me. One night I went to the ATM and got twenty bucks. On my way to the bar I dropped it. I realized only when I went into the bar and was ready to buy a drink. I then went back to the ATM, withdrew another 20, and then returned to the bar. (I actually found the 20 on the way back to the bar and bought a drink for the bouncer) According to the article, only 46% said yes. I would have only bought the bouncer a drink if I lost that 20 and then found it again. This attitude amazes me. What's wrong with us (humans)?
posted by BlueTrain at 10:45 PM on January 29, 2002

The idea of shareholders having any rights, other than ensuring that the business being "invested in" actually exists, is flawed.

Um yeah, congratulations, you've just destroyed the possibility of ever having a company bigger than about five people. Nobody's going to gamble millions of dollars.
posted by kindall at 10:47 PM on January 29, 2002

What I find funny is people who go to Austria, where you get a bunch of schillings (I forgot the exact exchange rate) for each dollar, and people think they suddenly have a lot more money.

But everything costs so much...
posted by dagnyscott at 8:17 AM on January 30, 2002

As someone who thinks about spending money wisely all the time, but manages to be pretty dumb in practice, I feel that this article hit the mark. Especially the bit about charging purchases on my credit card rather than spending money from savings, despite the whole "interest rate" thing. The worst bit is, I know it's smarter to buy things with money I actually have, but its more daunting to reduce my positive balance than to increase the negative one.
posted by croutonsupafreak at 9:13 AM on January 30, 2002

Example. a 50% discount and a 1.3% discount are vastly different even if they both equal $10. it's a question of value and need, not numerical equality. yeah, i could go across town to save the same ten bucks, but a) it's not as good a deal, b) i may not need a chair, and c) i probably don't have a spare $750.

This early point in the article confused me, too. I believe though, what the author is referring to is credit card debt for the sweater versus the time and money it took to drive across town to purchase the chair.

I found this to be an excellent article. Great post!
posted by schlaager at 9:30 AM on January 30, 2002

My take on the chair/sweater analogy is that it's irrational, but common, for a person to go out of their way to save $10 on a sweater that they need, but won't do the same to save $10 on a chair that they need, simply because $10 is a higher percentage of the total cost of a sweater. If you're going to buy a chair *and* a sweater, however, it doesn't make sense to make an effort to save $10 on one item, but not make a similar effort to save the same amount on the other. One of the points of the article seems to be that people place a different value on money depending on the context, and that's one of the things we do that baffles economists.
posted by Eamon at 9:35 PM on January 30, 2002

I was boggled by the odd example with the sweater and the chair as well. It seems like the author left out a part, there.

A few things made me say 'wow,' though. Not the least of which was the credit card example. To explain: I currently make as many purchases as possible with my Discover card and pay it back monthly. I do this because of the juicy temptation of that 1% cash back that Discover gives me -- it usually ends up being $100 - $150 annually. Not a lot of money, but arguably worth the trouble of carrying the card. Since the 1% is passed off to the merchant, I see it as secretly forcing the store to pay me for shopping there. Cool.

What I hadn't realized until tonight is that I very probably end up buying a lot more with my credit card than I would if I went strictly cash. A lot more than $150, in fact. So am I gaining or losing from this deal? I'm not sure.

I think I'll put the card in a drawer for a month or two and see what happens.
posted by Jonasio at 5:55 PM on January 31, 2002

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