Sun, May 25, 2008 - Page 9 News List

The science of economic irrationality

Conventional wisdom says a huge choice of goods makes it more likely one will make a purchase. But that doesn’t take into account human unpredictability

By Aditya Chakrabortty  /  THE GUARDIAN , LONDON

The branch of Sainsbury’s supermarket on London’s Cromwell Road is hardly a superstore, yet it stocks 197 varieties of cheese (plus another 27 diet versions), 42 types and sizes of bottled water, and enough sub-species of tomato to perplex a pizzeria.

It is, in short, a slalom course of options and decisions, of a sort we face every day — from picking gas suppliers to taking out a mortgage. The question is: Do we always choose what is right for us?

No, argues Dan Ariely, one of an increasingly influential group of behavioral economists, who analyze how people behave everywhere from supermarkets to stock markets — and they have found a chasm between what traditional economists and regulators presume we do and what really happens. One of the most exciting areas of research, behavioral economics could overturn many of the assumptions and assertions that shape modern policymaking.

Ariely presents his case, as is the behavioralist way, based on evidence from real life, such as Sainsbury’s. Instead of algebra, he uses shopping trolleys; in place of textbooks, he refers to shelf prices. And to attack the cliche that people always want more choice, he deploys ... jam.

“Economists know all about choosing jam,” he says, ambling down an aisle with 73 varieties.

He describes an experiment where academics set up a tasting booth in a store in California. On some days they put out six kinds of jam, on others 24. When the booth had 24 types, it was mobbed — “there was more color, more excitement.”

But it was the sales that were truly remarkable. With six jams on show, 30 percent of customers bought a jar; when 24 were out, only 3 percent did.

“Jams are hardly complex things, but people saw 24 stacked together and thought:

‘I have no idea how to deal with this.’”

If that is how choosing between strawberry or plum makes us feel, imagine the toll looking at mortgage options takes on the nerves. What Ariely’s jam study suggests is that, contrary to economic belief that more choice is better, confronted with too much complexity, we make bad decisions, or stick with what we have already got.

An example of that kind of inertia is right behind him. Three boys of Chinese origin are motoring down the aisle, their trolley stacked high with cheese-and-tomato spaghetti ready meals. They are engineering students.

“Did your parents teach you this was good to eat?” Ariely asked.

“No,” they chorus.

“There must be other things you could have. Of all the instant foods available in the UK, the only option you like is cheese-and-tomato spaghetti value meals?” Ariely asked.

There is no reply, only nervous giggling. It’s evidently hard work being grilled by an intense academic in red trainers.

“They have habits!” he beams.

Orthodox economists don’t recognize habits.

“They assume ordinary people do a constant cost-benefit analysis on everything they do. But actually, after you reach a decision, you say, ‘That’s the end of it!’ — and just continue,” he said.

Which is one reason why more competitors entering an industry does not immediately prompt customers to swap.

Jams, ready meals and a large dollop of human psychology: No wonder these behavioralist upstarts have come in for some sniffiness from the academic old guard. Most British students still graduate without ever coming across the field.

Which is a shame, because a lot of behavioralism sounds like an extended freshers’ week. In the name of research, Ariely has served beer laced with vinegar and persuaded Berkeley undergraduates to masturbate while filling in questionnaires on laptops (wrapped in protective film, naturally).

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