Book Explores Undiscovered Economics of Everyday Life
Source Newsroom: University of Chicago
Newswise — People can behave in surprising ways. This is what two economists have shown with imaginative field experiments, tests they give of people outside the laboratory to determine how the respond in real world settings to incentives and then compare those results with the ways people respond when they don’t have the same incentives.
They found that handicapped people are disadvantaged in the marketplace, people make choices about giving directions based on clothing style, that women’s reluctance to compete for salaries fuels inequality, that people are willing to give more if they can opt-out of future giving and that the price of wine is itself a fluid thing.
The scholars--John List, the Homer J. Livingston Professor of Economics at the University of Chicago and Uri Gneezy, the Epstein/Atkinson Endowed Chair in Behavioral Economics at the Rady School of Management at the University of California, San Diego--apply experimental tools to situations where they can test economic hypotheses related to human behavior.
The two are authors of the recently released book, The Why Axis; Hidden Motives and the Undiscovered Economics of Everyday Life, published by PublicAffairs Books.
“To us, economics is a discipline fully engaged with the entire spectrum of human emotions, with a laboratory as big as the whole world,” List said.
Gneezy added that the book provides “new understanding of the hidden motives that drive people to behave the way they do and of how we can achieve better outcomes for ourselves, our companies, our customers, and society in general.”
The two economists have conducted experiments around the world that seek to draw out the causes for behavior to give more meaning to findings in fields where mere correlations are usually used to provide answers. Frequently people are misled by correlations, they found.
Retailers can be confused about the impact of advertising, they point out. One company, for example, believed that when it advertised, sales went up accordingly. A closer look by the scholars showed that the increased sales came during the holiday season and were not influenced primarily by advertising.
Teasing out the causes of why people react the way they do requires a little more work. In addition to testing an incentive to behave in a certain way, the economists also included people in the experiment who were not given the same incentive, a control group that provided a reference point to the impact of the intervention. Here are some examples of what they found:
• Business people discriminate against the handicapped because they don’t expect them to shop around. In a test in Chicago, the scholars showed that when a wheelchair-bound person showed up for an auto repair, the bill was higher than it was for a non-handicapped person. When the handicapped person announced he was going to three price estimates, the repair costs were the same as for the non-handicapped. The discrimination takes place because of a desire to maximize profits, not because of a particular dislike for the group being discriminated against, the researchers said.
• People also discriminate when asked for directions depending on the dress of the person asking for help. In an experiment that echoes the recent Trayvon Martin case, the researchers found that people will send a young black man in a hoody the wrong direction when he asked for help, while they are more willing to help a black man dressed in business attire.
• Women receive lower wages because they are less willing to negotiate a salary as our society discourages women from competing. When told that negotiating salary was welcomed, women negotiated. To test the cultural basis of women’s taste for competition, the two visited a culture in India where women are dominant and learned they were just as competitive as men elsewhere and more cooperative in the marketplace.
• When people are given an opportunity to get dropped from a charity mailing, they frequently give more. To test effective fundraising, List advised a charity to let people give once and choose not to be contacted again. Giving doubled when people were given a “once and done” option and the size of giving also increased.
• Setting a higher price for a particular bottle of wine can boost sales. In an experiment Gneezy and his wife Ayelet conducted, the two helped a wine grower determine the value of cabernet sauvignon originally priced at $10 by charging $10, $20 and $40 for each bottle to different groups of visitors. They found that the bottle sold best when it was priced at $20 instead of $10. “People treat the price of the wine as a signal of quality, and when the price is higher they think that the wine is better,” Gneezy said.
Experimental economics is important at a time when large data sets, or “big data,” has come to attract scholars, as field experiments look at why people do what do, not just what they do, the scholars contend.
Because the experiments touch so many aspects of everyday life, the book helps a broad audience understand the role economics plays in understanding human behavior, List said. For that reason, the book is written for a larger audience in addition to scholars. “We wanted to write it in a way our neighbors could understand the role economics plays in their lives,” List said. — William Harms