Saturday, February 18, 2006
Economists believe that people make decisions on the margin. That is, if the marginal benefit of an activity exceeds the marginal cost, then the individual will engage in the activity. When I argue that people undervalue experiences, I am, in economics terms, effectively saying that people misperceive the marginal benefit of activities.
How can this be?
Well, what constitutes the benefits of a given activity?
1) There is the direct consumption (enjoyment) of the activity while I am doing it. Further, if there is any investment (e.g., skill acquisition) involved in the activity, then the discounted, expected benefit of that investment will also be included.
2) There is the enjoyment of reliving the experience privately later on through memory.
3) There are the benefits of reliving the experience publicly through stories. These benefits have two parts. First, there is the fun of telling the story and enjoying the attention and responses of others. Second, sharing our experiences with others (particularly others who have similar experiences themselves) is an essential part of creating and maintaining social connections which provide enormous returns (e.g., friendships, favors, etc.) over longer periods.
In arguing that people underconsume experiences, I am arguing that they are failing to appropriately assess at least one of these potential benefits.
Is this likely? Is it likely that people just forget (or don't realize) that their memories are valuable?
Explanations which rely on people making systematic mistakes are generally unsatisfactory to economists. We view humans as rational, and, as such, they should not consistently make mistakes. Yet, for me to believe that people are not optimally engaging in activities, I have to believe that they do. More specifically, at least one of these specific assumptions must be true:
1) People forget memories when making decisions. That is, numbers 2 or 3 above just don't factor into the decision at all.
2) People underestimate the probability that a given experience will be memorable. People are aware that memories are useful, but they incorrectly assign essentially a zero probability to the likelihood of any given experience being memorable.
3) People underestimate the chance that a given experience will be useful in creating and maintaining social relationships. Given the uncertainty about who you will meet and what they will respond to, people incorrectly believe that the expected ex post social benefit of a given activity is close to zero.
(These last two could also alternatively be thought of as people being more risk averse than I imagine them to be.)
4) People understand that experiences are durable, but they substantially discount the future.
5) People don't properly assess even the direct, contemporaneous consumption benefits from the activity.
Which of assumptions are likely true? I don't know. That is an empirical question. However, if I want to continue to argue that people underconsume experiences at least one of these must be true.
On a related note, a great Calvin and Hobbes 3 day series agrees with (heck, it helped to shape) my view and suggests that paternalistic intervention can improve outcomes. I can't figure out how to link to it, but I will describe it. (For devotees, it can be found on page 9 of Attack of the Deranged Mutant Killer Monster Snow Goons.)
Calvin: C'mon Hobbes, we have to go outside.
Hobbes: We HAVE to?
Calvin: Yeah, Dad won't let me watch TV. He says it's summer. It's light late, and I should go run around instead of sitting in front of the tube. Can you believe it?! What a dictator!
Hobbes: How cruel it is to be forced to play.
Calvin: I'll show him. I'll refuse to have fun.
[The second day shows Calvin and Hobbes having fun.]
[The final day]
Dad: It's getting dark Calvin. Time to come to bed!
Calvin: But Hobbes and I were catching fireflies. Can't we stay out a little longer?
Dad: Ha! First you didn't want to go out, and now you don't want to come in! See, by not watching TV, you had more fun, and now you'll have memories of something that you DID, instead of something fake that you just WATCHED.
Calvin: Nothing spoils fun like finding out it builds character.
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