I listen to WBUR's NPR programs quite a bit these days. I'm "visiting" at Boston College and so I'm away from home, family, and other entertainment. This morning Tom Ashbrook interviewed Dan Ariely of Harvard about his new book, Predictably Irrational. If you go to this link, you can read a few brief excerpts. It's an easily accessible book about bounded rationality--framing, anchoring and other biases that lead us to make decisions that do not maximize our wealth (which, of course, in economist-speak, is what life is all about). Clearly behavioral economics is a step ahead of plain old economics, but I suspect both have a way to go before they will have incorporated enough psychology, sociology and social justice ideas to even begin to claim to be a good theory of human behavior. But the insights can still be useful.
Here's what I liked. Ariely noted that people have trouble making intertemporal comparisons. When we stop in a Starbucks to buy a cup of coffee, we seldom stop to think what we might do with that money in the future if we didn't spend it now. It is in fact hard for us to think in those terms--present wants/needs versus future wants/needs.
Congress obviously has that problem in a big way. Elections push them to think constantly of the "now"--what will impress voters, what will get them re-elected. It is very hard for them to think of the future--what will happen to the deficit if we patch the AMT, giving a huge tax cut to wealthy Americans, without an offset from somewhere else? Who will pay eventually, and will that be fair? And since it is so hard, they just don't do it most of the time. Too bad. We get some very bad decisions.
By the way, Ariely was also on All Things Considered back on Feb. 21. If you go to this link, you can read another excerpt from the book about the fact that we live in two separate worlds--the world of social norms and the world of market norms. Social norms often provide the glue of society--we lend a hand to a neighbor, and the neighbor later helps us out. We feel guilty when we break in line, and thus tend not to do it unless it is terribly imporotant (we hope). Etc. But if an activity that is ordinarily governed by a social norm is taken over by a market norm, we lose the ability to pay attention to the kinds of things that were important in the social norm. Areily's example is of parents arriving late at a day-care center. When they did, they felt guilty. So it didn't happen often. The day-care center hoped to discourage it altogether. So they instituted a fine. Once the parents thought they were paying for it, they were tardy even more. The market norm made it okay to be tardy--just pay the fine.
So, as we know, markets definitely don't solve all problems. In fact, they create some.....