Not so irrational


Jason Collins


December 30, 2011

In Freeman Dyson’s interesting review of Daniel Kahneman’s Thinking, Fast and Slow, Dyson describes a couple of examples of the biases identified by Kahneman. One of them is as follows:

The endowment effect is our tendency to value an object more highly when we own it than when someone else owns it. …

In poor agrarian societies, such as Ireland in the nineteenth century or much of Africa today, the endowment effect works for evil because it perpetuates poverty. For the Irish landowner and the African village chief, possessions bring status and political power. They do not think like traders, because status and political power are more valuable than money. They will not trade their superior status for money, even when they are heavily in debt. The endowment effect keeps the peasants poor, and drives those of them who think like traders to emigrate.

Why would a landowner or chief give up their political power and status? There may be an endowment effect in that they value the power and status more when they have it, but if we think in evolutionary terms such as the desire for status and power, and the ability to attract mates, it would not be in the interest of any landowner or chief to step down.

This is typical of many uses of behavioural economics where the rationality underlying actions is skipped over in search of potential biases. The bigger picture is missed. People may use less electricity if they are provided real-time data on the use and price, but they will use far less if the price goes up. People eat burgers not because they don’t know they are full of calories, but because they taste good and are cheap. While there is potential for a small behavioural error or bias, the focus on the error masks the fundamentally rational action. And many times a bias is identified when the problem is that we don’t understand what the person’s objective is.

As an aside, earlier in the article, Dyson does hit on one of my favourite factoids:

A striking example of availability bias is the fact that sharks save the lives of swimmers. Careful analysis of deaths in the ocean near San Diego shows that on average, the death of each swimmer killed by a shark saves the lives of ten others. Every time a swimmer is killed, the number of deaths by drowning goes down for a few years and then returns to the normal level. The effect occurs because reports of death by shark attack are remembered more vividly than reports of drownings.