Assignment #2 – Reflection – Cheryl Soehl
October 2nd, 2009 at 18:58I am not an unmitigated egotist, but I am going to post my reflection first, then go back and comment on others’ posts. We have been incredibly busy this week with our largest event of the year (Parents Weekend) and this is the first time I have had a block of time to write. I do intend to read and respond to everyone else as I can eke out the time, but wanted to get this online at least…
The Ariely Video – I really enjoyed Ariely’s wry sense of humour and the gentle matter of fact way that he moved the discussion along when illustrating how utterly unrational and gullible we all are when making decisions about gain and loss. Having known a young person recently who suffered a terrible burn injury and spent over a year in rehabilitation I wonder if perhaps this particular kind of experience — tremendous pain and trauma — modifies one’s world view so extravagantly as to give one an exotic and detached perspective nurtured by the necessity of dissociating from one’s physical presence in defense of one’s sanity while undergoing such extraordinarily painful procedures. Ariely seems to be able to regard our collective irrationality with the kind affection that our creator might have for our cluelessness while holding out hope that we can, if we just try harder, grasp at least a minimally coherent framework for our individual and collective efforts to improve our lot. His illustrations both embarassed and inspired me. What poor thinkers we humans actually are, but what hope scientific examination of how we operate our thinking mechanisms (or are operated by them…) give us to reach a more effective level of functioning! I didn’t have time to view the other related videos, but am eager to go back and sample them. These concepts are challenging, but really exciting in terms of gaining tools to use in working not just in economic, but in social systems.
Prospect Theory – I found this reading rather dry (as soon as you start writing formulas, my mind begins to wander) and challenging. I quickly wandered off to read the wiki entry about intertemporal consumption, which I found much more to my liking. As a person closer to retirement than most I have begun reluctantly to contemplate whether I 1) can afford to retire at the Social Security full benefit age or 2) will need to continue to work to maintain my not very extravagant lifestyle. Not being a planner or a careful resource consumer, I begin to see that I may end up with a very limited income … I wondered whether these models were always evaluated in terms of individuals or if there is a model that looks at couples as economic units in terms of the behavioural life cycle. It seems to me that the couples I know who have been together for a long period of time with both individuals working and hopefully saving at least a little are collectively better off even if you halve their assets than individuals. Is there a factor that encourages asset accumulation and lessens risk taking when people are pooling their resources?
Endowment Effect – This is where my ears really started to burn because I know I am very inclined to overvalue my “things” when considering whether to have a clean and tidy house or save my collections of books, musical instruments, and handcarved deities as “investments” for my old age (or inheritance for my only child). What was not really addressed in this article that I am curious about is how much does actually knowing the potential value of an item if held over time with the likelihood of scarcity creating demand affect the rationality of the value with which one endows the item? For instance, I generally never buy books new. I purchase them used in good condition at a variety of venues (yard sales, thrift stores, church bazaars, etc.) I have a certain amount of knowledge about book values, though am not an expert by any means. Many of my books are scarce and a few are becoming rare. Almost all of them are potentially worth at least as much as I bought them for. Even though I might be able to liquidate them by selling online or having a yard sale, the prospect of them increasing in value due to increased scarcity prevents me from going to the trouble of selling them. In the Arielly experiement, the tickets in question really were only as valuable as the amount a big fan would pay prior to the game to obtain them. The value invested in them by the fans who had run the gauntlet to get them was clearly not rational based on demand for the tickets, but this was a time-limited opportunity. What if the item had been a signed football? There would have been a real time current demand price that could be assigned, but also a potential for a tremendous gain if, for instance, a player on the team won a Heisman, or the school won an SEC tournament. Holding the asset could be an incredibly smart decision. I am guessing we are venturing into the kind of economics involved in making stock purchases and commodities investing — an area where I am completely adrift and untutored.
Loss Aversion – In evaluating risk aversion, I am convinced that inborn personality traits heavily influence decision making in terms of risks and would question how to evaulate risk-taking across a broad spectrum of humanity. Given that particular genetic dispositions could dominate in a small isolated community, one might find that a peaceful cooperative community of shy people would harbor a strong majority of risk-averse individuals while a frontier community of recent immigrants would contain a strong majority of eager risk-takers. The risk evaluation would have more to do with the inborn and environmentally conditioned willingness to take risks than the nature of the risk itself, yes?
Framing – This concept is moving into an area where I have some real interest in developing tools for promoting pro-social behavior. Framing techniques would be extremely valuable in educating college students in making lower risk choices about alcohol and other substance use. Risk reduction as an activity of college administrators is a constant and ever-shifting pursuit of the magic combination of presentations of relative risks and absolute benefits of abstaining (or at least moderating) this behavior. Most recently we have abandoned the “social norming” approach as not very effective (they just don’t believe our stats!!) and we have moved to a pro-social behavior enhancement message about group caring and attentiveness, peer partner responsibility, and self-sacrifice for the common good (the designated driver ploy). This seems to work better with our “millenials” who are more group oriented and willing to look out for their peers and work as teams.
While I was on my way to looking up something else, I came across a document that outlines a process for community collaboration in the service of a social rather than economic goal (maws.org/tctatsite_top/FVFF%20Curic/2.pdf ). It provides a ten-step group process for transforming communities that begins, of course, by defining the issue, and progresses by stages to re-frame the group understanding of and value for social transactions. This is the kind of information that I am digging for in behavioral economics to illuminate the ways in which to improve quality of life for all of us. This is the hopeful outcome that I think Ariely is hinting at when he tells us that the discovery of our irrationality is not all bad — there is room, if one works at understanding, for improvement! – Cheryl Soehl
October 4th, 2009 at 11:09 pm
I feel your pain with the Prospect Theory thing. I could barely look at it!
Interesting you bring up couples. I can’t remember where I was reading it this week–was it for this class?–but there is a whole thing about how you take on roles in relationships where you are responsible for this and your son is responsible for that and your partner is responsible for something else. Essentially, you now have 3 brains at your disposal instead of one, or not even at your disposal–directly in your service. They called it an external or outside memory or something like that. The person in the house who is in charge of knowing how to work the pc is also responsible for keeping up with changes in that arena, and the other ones are responsible for keeping up with whatever goes on in their areas of responsibility. This way the information overload is manageable. And it was proposed that this is why people get “confused” when their spouse of many years dies–because they have lost half their brain. I wonder how that affects rational decision making!
Interesting about the items you collect. Again, I think it was something outside of this class that I read this week, but they observe that landlords who own a property for investment and go to sell don’t have the same endowment effect that homeowners living in their own home do. There was something about baseball cards, too. Amateurs and professionals are affected differently by this. Must be a combination of what you said about having a realistic view of the value of something based on your special knowledge and expertise of that domain but also having more or less skin in the game after having the object for a certain amount of time, being emotionally close to it or not because of what it means in your grand scheme (is it a token, a short-term investment, or your prized possession), having to give up because you need the money desperately to live versus letting go because you no longer have a use for it, facing the idea you mentioned about being a good economy or bad economy for selling the thing at that time and having to do so under present conditions versus being able to wait if the market isn’t right, etc. The disposition effect says people will keep stocks that tanked because they don’t want to recognize the loss and that is somehow the opposite of the normal risk aversion, which I don’t really get.
On the loss aversion thing, hmmmm. i used to work in personality testing. Yes, some people are generally more “risky” than others–there is a dispositional component. Yes, part of the effect of the environment you grow up in is that certain things develop in your personality, so you could become more or less conservative. Behaviorally, you may have better or worse impulse control. But I think loss aversion is saying that across the board, all people (regardless of how “risky” they are) want to avoid loss (and want to avoid loss more than they want to attempt to acquire gain). So you wouldn’t compare person A to person B in terms of how devastated they are when they lose something. You would compare person A to himself when looking at how devastated he would be to lose something versus how much that therfore affects how he risky he thinks a situation is where he could gain something. Loss aversion versus risk aversion is confusing. It sounds like risk aversion says we are more likely to take on the devil we know versus the one we don’t. But how much more likely that is for me versus you could vary.
This material doesn’t seem so hard on the surface, but gets confusing when you try to dig in! I don’t know whether you are a reader, but since you like rare books I would guess that you also read. There is a recent book called Influencer that might be up your alley for ideas with the college issue. Watch out because there is also one called Influence and that isn’t it! Anyway, Influencer really talks about what it takes to change behavior and it might be something you’d benefit from. Stylistically, it may not be up your alley–if you are talking rare and scarce I’m assuming you like the classics. This one is very much contemporary business lit–in the style of The Tipping Point and books like that. But you said you like Arielly, and if he writes like he talks then his book is probably the same style.