StillerInCT wrote:
Zeke5123 wrote:
3. Finally, while I do believe we have biases sometimes I think the psychologist-cum-economists misconstrue what is a bias. Eg, hyperbolic discounting. Let’s say for services rendered I offer you a payment today and a payment in a year. For the payment today, I offer you a dollar today or two dollars tomorrow. For the payment in a year from now I offer you a dollar in a year from now and two dollars in a year + 1 day from now. Many people choose the dollar today and the two dollars a year + 1 day from now. Richard Thaler and co. would tell us this is an example of biased thinking. I’m not so sure — can you spot the problem in the bias?
They take the dollar today because they'd accept the lower amount sooner. They'll take the two dollars a year + 1 day from now because they are already waiting 365 so what's another day's wait for double the money? I'd say the bias is towards immediate consumption in the near term.
The general convention is that a dollar today is worth more than a dollar tomorrow (TVM), but the economic reality is that 1 day hardly makes a difference in this scenario. It's unlikely you'd be able to find a suitable investment to double your money in a single day or that inflation would jump 100% to erode the value of the $2 you'll get tomorrow. So you take the $2 tomorrow and the $2 a year + 1 day.
That’s the bias Thaler says exists. However, the potential error relates to credit worthiness. If my only information is that you can offer me a dollar tomorrow or two dollars the day after, I might choose the dollar because I don’t know if you’re good for the two dollars. However, if in a year from the date of the deal you are able to pay a dollar, then my confidence that you’d be able to pay in aYear plus a day increases vis-a-vis the dollar tomorrow, or two dollars in two days. Thus, the two separate choices may not be a bias.
Moreover, while I haven’t fully worked this out the humans making the decision don’t need to understand that credit rationally explains the different choice. Instead, certain features of our nature may cause us to choose what would appear to be irrational results that upon deeper reflection do not appear to be irrational, even if we can’t explain the rationale.
I think this is because evolution doesn’t require selection of the right reasons and the right choice; instead, ceteris paribus, evolution only requires the right choice. Of course, this can create issues when environment changes, but I do think it’s a fundamental issue with behavioral economics. It seemingly starts with the assumption that behaviors that prima facie appears irrational (indeed, the subject likely would tell a story that is irrational) and then based on that prima facie bias / story of the human declares bias A B or C. However, if there is a disconnect between the purpose of the action and the result of the action, then the enterprise falls apart. Moreover, many of these behavioral economists just don’t think out of the box enough before labeling something a bias; evolution is powerful and Chesterson’s fence applies just as much to labeling human behavior as being the result of bias as it does to public policy.