Why my students dump their boyfriends: The 3 most eye-opening ideas in economics(learnliberty.org)
learnliberty.org
Why my students dump their boyfriends: The 3 most eye-opening ideas in economics
http://www.learnliberty.org/blog/why-my-students-dump-their-boyfriends-and-girlfriends-the-3-most-eye-opening-ideas-in-economics/
21 comments
I think you're right, things aren't that simple, but I have the feeling when I used these 3 points in the past, things went better.
But on the other hand, I always have the feeling, relationships go better if they aren't emotionally evaluated too much.
Sunk Costs
I've seen relationships go to shit but people are like "we are together for 10 years now, I can't leave them!" even in face of domestic violence or general abuse.
Yes the 10 years were nice and you paid them with your lifetime, but do you want to pay the shitty part too or just leave it by the 10 nice years?
Nothing is Free
I've seen relationships between people who simply don't fit together, but one part wanted to keep the other around, because of ... reasons? The other was way out of their league, attractive wise, and knew it. The other part was rich, and knew it.
Sometimes the other part was even the almost perfect fit, but didn't get their life in order.
Revealed Preferences
I've seen so many people who say A and do B. Especially in relationships. Talk is cheap and I did it too, in the past, but if you always say you want kids and never have them, time is over someday.
But on the other hand, I always have the feeling, relationships go better if they aren't emotionally evaluated too much.
Sunk Costs
I've seen relationships go to shit but people are like "we are together for 10 years now, I can't leave them!" even in face of domestic violence or general abuse.
Yes the 10 years were nice and you paid them with your lifetime, but do you want to pay the shitty part too or just leave it by the 10 nice years?
Nothing is Free
I've seen relationships between people who simply don't fit together, but one part wanted to keep the other around, because of ... reasons? The other was way out of their league, attractive wise, and knew it. The other part was rich, and knew it.
Sometimes the other part was even the almost perfect fit, but didn't get their life in order.
Revealed Preferences
I've seen so many people who say A and do B. Especially in relationships. Talk is cheap and I did it too, in the past, but if you always say you want kids and never have them, time is over someday.
> A common example to help explain sunk costs is the movie theater experience, where a person buys a ticket and, 20 minutes into the movie, she realizes that it is a horrible movie and it will only get worse.
Offtopic I know, but twice in my life I've walked out of a terrible movie at the theater within the first 30 minutes and gotten a refund from the manager. Don't think you have to sit through terrible movies!
Offtopic I know, but twice in my life I've walked out of a terrible movie at the theater within the first 30 minutes and gotten a refund from the manager. Don't think you have to sit through terrible movies!
That is absolutely absurd to me. I understand walking out, but getting the refund had to have caused some eye rolls and jokes at your expense after you walked out. Where does it end? Can you walk out and get a refund because you didn't like the last 20 minutes? I think this sort of speaks to the absurdity of some aspects of this "get mine" mentality cultivated among economists
Fair point. Hell, you could even argue that you didn't like the ending... Refund!
One thing you might notice when traveling a lot, the US attitude towards refunds (ie. when reasonable, and I would argue even when "slightly" unreasonable in the interest of customer service) differs a LOT from most countries attitude towards refunds (which can be summarized as essentially only when convicted in a court of law - and even then)
Now if only that worked with relationships...
While I'm sure he knows this, most reasonably social college students reflexively trade up in dating and I would hazard to guess they are near equilibrium. Economics basically reifies these implicit social concepts. That said, most dating market choices are not easily explained with the perfectly competitive market in a vacuum analogy that gets used in economics 101. For example, the sunk cost bias is actually metarational in the sense that it asks: "Am I really right about the grass being greener on the other side? How important is it to me to trade up?" which incorporates the concept of subjective beliefs and risk which is not addressed in the perfect information scenario and may not even be something that's tractable to explain in a rational actor model
I'm not really convinced by his third point "Revealed Preference — Actions Speak Louder Than Words". I mean it's a useful concept to understand some interactions but it seems to me it also fails on some simple examples like payday loans and software bundling.
"My point is that if the exchange is voluntary and there is no fraud or misrepresentation, then it is a win-win transaction." Though maybe it can be argued that with abusive loans and getting Windows on most computers the exchange is not voluntary?
"My point is that if the exchange is voluntary and there is no fraud or misrepresentation, then it is a win-win transaction." Though maybe it can be argued that with abusive loans and getting Windows on most computers the exchange is not voluntary?
I just commented with the concept of "bargaining inequality" which is more commonly used with employment, but it also works with Windows...this is one thing the popular america-libertarian intellectuals (the OP is funded by a libertarian think tank with the Koch brothers and their ilk as funding source) tend to dismiss/obfuscate in my opinion: they focus on the ideal "voluntary transaction" and generally don't address real-life,studied power dynamics in human groups
How is a payday loan not a win-win transaction ?
The person getting the loan obviously values money now more than total amount of money, for some reason (which may or may not make this preference entirely voluntary).
The person providing the loan values total money more than having constant availability of all their money (ie. they're investors). And I'm sure you would argue they also value more money more than ethics/decency.
Ie. the reason the economy works is that while price may be the same between buyers and sellers, value is subjective. Therefore it is a win-win in that both parties increase their perceived value through this transaction. This is also how a mortgage works, for instance.
The person getting the loan obviously values money now more than total amount of money, for some reason (which may or may not make this preference entirely voluntary).
The person providing the loan values total money more than having constant availability of all their money (ie. they're investors). And I'm sure you would argue they also value more money more than ethics/decency.
Ie. the reason the economy works is that while price may be the same between buyers and sellers, value is subjective. Therefore it is a win-win in that both parties increase their perceived value through this transaction. This is also how a mortgage works, for instance.
> How is a payday loan not a win-win transaction
Usually because the borrower is not in a rational state of mind, and because we as humans focus more on today than tomorrow. Payday loans (like the loan sharks of old) take advantages of this in order to put borrowers in positions that a rational, future conscious person would never get into.
Economics say one thing, but it's the humans in the equation which muck up these otherwise ideal economic principals. Ultimately, economics should be there to serve people, not the other way around; payday loans are there to exploit people in need, not serve those who are in tough situations.
Usually because the borrower is not in a rational state of mind, and because we as humans focus more on today than tomorrow. Payday loans (like the loan sharks of old) take advantages of this in order to put borrowers in positions that a rational, future conscious person would never get into.
Economics say one thing, but it's the humans in the equation which muck up these otherwise ideal economic principals. Ultimately, economics should be there to serve people, not the other way around; payday loans are there to exploit people in need, not serve those who are in tough situations.
We can't assume that all of the borrowers aren't in a rational state of mind. And I'd hesitate to even say most of them aren't.
Payday loans serve a pretty specific purpose: covering short-term cash flow when you can easily pay off the interest in the next term. This is a fairly common problem for people on the low-income scale with little emergency savings. If a car breaks down, it may cost $350 to fix it, and that money is necessary now and not 10 days from now. It used to be that people would ask for advances from their employers, but this is a solution that sidesteps that.
Payday loans serve a pretty specific purpose: covering short-term cash flow when you can easily pay off the interest in the next term. This is a fairly common problem for people on the low-income scale with little emergency savings. If a car breaks down, it may cost $350 to fix it, and that money is necessary now and not 10 days from now. It used to be that people would ask for advances from their employers, but this is a solution that sidesteps that.
Personally, I couldn't disagree more. It's my belief that people who think that those who take on really poor debt are in their rational minds and have a complete understanding of the consequences are really just trying to make themselves feel better about how badly their peers being taken advantage of. "It's their own fault; the system is fine."
But enough of beliefs. There is plenty of documentation about the costs to society available, including formal studies, which shows that even taking the time to better educate people about about the long term effects significantly reduces the uptake of payday loans.
Yes, in a few cases, they are useful as replacement for emergency funds. But I'm convinced by the literature and studies done about payday loans that if this kind of use is even a majority - it's barely such.
But don't take my word for it. Do a search for the "psychology of payday loans" and read some of the first party sources yourself.
But enough of beliefs. There is plenty of documentation about the costs to society available, including formal studies, which shows that even taking the time to better educate people about about the long term effects significantly reduces the uptake of payday loans.
Yes, in a few cases, they are useful as replacement for emergency funds. But I'm convinced by the literature and studies done about payday loans that if this kind of use is even a majority - it's barely such.
But don't take my word for it. Do a search for the "psychology of payday loans" and read some of the first party sources yourself.
Excellent response.
The only thing I'd like to add is that you cannot design a system that allows for individualism and yet somehow does not require individuals "to be in a rational state of mind".
Besides, that is like attempting to "protect" a drug addict from the consequences of their actions. It is the one thing in the world that is worse for them than letting them suffer.
The only thing I'd like to add is that you cannot design a system that allows for individualism and yet somehow does not require individuals "to be in a rational state of mind".
Besides, that is like attempting to "protect" a drug addict from the consequences of their actions. It is the one thing in the world that is worse for them than letting them suffer.
Yes, let's let the drug pushers continue to legally advertise and sell their harmful drugs, and be sure to assign the blame onto their customers.
Great analogy.
Great analogy.
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I doubt the examples he mentioned can be reduced to simplistic economic theories.
For the movie for instance people could stick on hoping things will get better and things could.
For relationships most are loaded with emotions that make us irrational and decisions to make or break would also involve a multitude of other factors well beyond the scope of economic theories of sunk costs and self interest.
Listen but make your own decisions. You learn by listening to yourself, making your own mistakes and taking responsibility for them.
For the movie for instance people could stick on hoping things will get better and things could.
For relationships most are loaded with emotions that make us irrational and decisions to make or break would also involve a multitude of other factors well beyond the scope of economic theories of sunk costs and self interest.
Listen but make your own decisions. You learn by listening to yourself, making your own mistakes and taking responsibility for them.
The sunk cost fallacy fallacy: you have perfect knowledge of what other options you have, all specific knowledge and experience acquired in your current course of action is worthless and persistence never pays off.
Given how prevalent the so called sunk cost fallacy is in humans, you would think smart people would give a bit more thought to its darwinian origins.
Given how prevalent the so called sunk cost fallacy is in humans, you would think smart people would give a bit more thought to its darwinian origins.
I adhere rather vigorously to points 1 and 2 because I value my time over most things. But, I find 3 a stretch. A movie is overpriced when you are unable to realize the full potential of the market. Last I checked, piracy is still a problem.
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Click around...project of IHS...
https://en.wikipedia.org/wiki/Institute_for_Humane_Studies#O...
None of the concepts are wrong, but things are more complicated. For a short summary on the idea of Inequality of Bargaining and consequential hollowing of the "voluntary" transaction you can check out https://en.wikipedia.org/wiki/Inequality_of_bargaining_power
Interestingly, one area where this is taken into account, is study design (i.e. thinking about when a reward will skew the results/be unethical towards participants)
For some discussion see: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3646546/ https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2600442/ https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2600442/#S2titl...