Wednesday, May 28, 2008

Knowledge Isn't the Solution to Everything...

As a behavioral economist, I am curious as to the degree to which making people aware of their biases would make the biases go away. For example, would people stop procrastinating (or at least be sophisticated rather than naive, in economic terms) if they were told that they were doing so? Would they make better risky choices if they were aware of the concept of loss aversion?

My conjecture, based on my reading and casual observation, is "sometimes". Often times in economic experiments it is clear that subjects that have studied economics behave differently from those who have not. (It's also possible that people who choose to study economics are just intrinsically different from others.) That said, I present the following example:

Behold the concept of this context, once an individual has an anchor, she is unwilling or unhappy to pay a price higher than the anchor and feels like she is getting a good deal if the price is below the anchor, even if the anchor price was completely arbitrary. Clearly I am aware that this bias exists...but fast forward to me trying to buy a Wii Fit online- I was perfectly happy to pay a price of roughly $160 on Amazon Marketplace until I noticed that the list price was $89.99. This mostly irrelevant fact did in fact prevent me from making a purchase, which shows that biases such as the ones arising from the anchoring effect are not only intellectual curiosities but have real economic impact.

(Sidenote: one could argue that I am in fact rational, and that the list price should prevent me from purchasing simply because it tells me that I will eventually be able to get the item for that price. Personally, I don't think that that explanation jives with my impatience and/or desire for immediate gratification.)