Almost everybody has had the experience of wondering if the problem with one's car is really as serious as the auto mechanic says"”or if the mechanic is blowing it up to charge more. In our dealings with the body shop, as in many other situations, we are at what the experts would call a humongous informational disadvantage. We are always conscious of the possibility of getting charged way too much. And we sometimes are"”but rarely do we run into the perfectly unscrupulous tradesman who rips us off as badly as we fear he can.
Car repair isn't one of the professions that Steven D. Levitt and Stephen Dubner look at in their best-selling Freakonomics or their new SuperFreakonomics. But it's an example that's familiar to everyone and useful in thinking about questions like "How do we know when we're getting a fair deal?" or "How likely are we to be misled in our dealings?" or (for those who are, like me, clueless about cars), "Why don't we get ripped off all the time?"
Most of the attention focused on SuperFreakonomics so far has focused on the odd solutions to global warming considered in the last chapters. But the animating question of the bulk of Levitt and Dubner's books is "How well can economics explain human behavior?" Modeling human actions is Levitt and Dubner's main subject, and the answer they like to give"”the answer that gives the books their appeal"”is "surprisingly well." Their complex examples tend to return to a simple theme, which is that understanding folks' rational (and quantifiable) financial interest lets us create a pretty good model of how they act. Basically, for Levitt and Dubner, at heart we are Homo economicus: rational, self-interested actors.
The cleverness of the Freakonomics approach is that taking a cold, calculating look at how people view their financial returns yields some fascinating tidbits, from how much a real-estate agent is likely to underprice your house to why prostitutes work for pimps. The weakness, though, comes in the big picture. Levitt and Dubner have sold us on the fun stuff that the Homo economicus picture can explain"”even as current events are making us ever more aware of what it can't.
One of the heroes of Levitt and Dubner's book is a University of Chicago economist named John List, an expert in behavioral economics (a portion of the List chapter is excerpted here). As SuperFreakonomics tells it, List set out to do a series of experiments based around a game called Dictator. Dictator is a classic experiment in which one player (the "dictator") is given a sum of money"”say, $20"”and asked to split it with a second participant, who has no say in the matter.
In the original Dictator, the player with the money has a choice of splitting it down the middle or keeping 90 percent of it for himself. There is no penalty for keeping almost all the money, yet nonetheless most players chose to split it. Other experiments played with the basic setup to come up with variations, and the basic result, which held true across many different cultures, was that most players would try to come up with something close to a "fair" split. A lot of folks took this as evidence of a hard-wired human sense of "fairness" or "altruism."
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If you really understood your Econ 101 teacher, you would have understood self interest to include other measures than purely financial. Therefore people do act in their self-interest, which includes other things bsides monetary gain. The problem is that economists, and others, have a difficult time in discerning self-interest when objectively it appears that someone is bhaving irrationally.
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