Monday, October 01, 2012

Rationality, Behavioural Economics and Folk Wisdom

I asked people on twitter for examples of folk sayings that map to behavioural economics and rationality concepts. I think Marie wins this one with her list below.

It goes without saying… (though there's an exception to every rule)
Do we really need to teach economics, when some elementary revision of good old proverbs would do the job quite nicely?

From Neo-classical to Behavioural economics
First, some basic micro-economics. -classical economic wisdom features in “He who pays the piper calls the tune”, “Fair exchange is no robbery”, “You pays your money and you takes your choice”, “Beggars should not be choosers”, “If you pay peanuts, you get monkeys”  and “Money makes the world go round.”  The law of diminishing marginal utility comes through simply in sayings like “A change is as good as a rest”, “A little of what you fancy does you good” and “Enough is as good as a feast”. If that’s not sufficient, then consider these: “Enough is enough”, “Less is more”, “Moderation in all things” “Variety is the spice of life”, “You can have too much of a good thing”. 

There is a nod at the main findings from labour market economics in “Every man has his price”, “Jack of all trades, master of none”, “Time is money”, whilst the trade off with leisure is summed up in “All work and no play makes Jack a dull boy” and “Man does not live by bread alone“. Diminishing marginal productivity also features as “Too many cooks spoil the broth”.

There are sayings that inform portfolio management like “Don't put all your eggs in one basket”, and savings, like “A penny saved is a penny earned”.  Of course, the concept of opportunity cost is also summed up neatly in “There's no such thing as a free lunch” whilst the importance of letting “bygones be bygones” is put simply in “It's no use crying over spilt milk”.

The general neo-classical attitude towards preferences is summed up in “There's no accounting for tastes”. Concerns with equity are also brushed off quickly in the proverbial world - as they are in neo-classical economics with “One law for the rich and another for the poor”. Likewise legal instruments: “The law is an ass”

In what may be the strongest endorsement of behavioural economics to date, proverbs are particularly rich in describing the findings from this particular sub-field of economics. Several sayings suggest that rational economic behaviour may be less commonplace than suggested by neo classical theory, for instance: “There's nowt so queer as folk”, “A fool and his money are soon parted” and “A little knowledge is a dangerous thing”.

Salience, framing, attribute substitution..
There is a wealth of proverbs that warn against susceptibility to salience effects: “It's the squeaky wheel that gets the grease”, “Out of sight, out of mind”, “Seeing is believing”, “What the eye doesn't see, the heart doesn't grieve over”, and “A picture paints a thousand words”. The tendency for people to substitute attributes is hinted at in “A drowning man will clutch at a straw”, “There are none so blind as those, that will not see”, and actually actively encouraged in “Cleanliness is next to godliness”, “Clothes make the man”,  and “Ask no questions and hear no lies.”  We are warned against framing effects in “All that glisters is not gold”, “Give a dog a bad name and hang him”, “Never judge a book by its cover”. A clue to priming effects could have been drawn from “A word to the wise is enough”, and “There's no smoke without fire”.  It is worth exploring whether and when “Actions speak louder than words” and whether people really do act on the heuristic that “Barking dogs seldom bite.”  Another possible field for a future research agenda is to what extent “Flattery will get you nowhere”.

Beyond self interest
The importance of pro-social behaviour also emerges clearly in folk-wisdom. From warm-glow effects - “Virtue is its own reward”, “It is better to give than to receive”, to reciprocity - “Do as you would be done by“, “One hand washes the other” “One good turn deserves another” and “Love thy neighbour as thyself.” Pro-social preferences are described as “Charity begins at home”, “Share and share alike” and “ Cold hands warm heart”. The importance of pro-social behaviour is summed up in “A volunteer is worth twenty pressed men”.

The reluctance to wield out altruistic punishment can also be explained by expressions like “People who live in glass houses shouldn't throw stones”. It seems we also knew the findings of ultimatum games all along, with sayings like “don’t cut off your nose to spite your face” and “don’t look a gift horse in the mouth”. Likewise, knew all along that “Revenge is sweet” and that it is “a dish best served cold”.

Endowment, loss aversion, status quo and anchoring
Proverbs provide a succinct understanding of what people experience with endowment effects and loss aversion in sayings like “Count your blessings”, “Better the Devil you know than the Devil you don't”, “You can't have your cake and eat it” and “You can't make an omelette without breaking eggs”.  Research findings are also confirmed in “Easy come, easy go”. This said, it would be interesting to invite further research as to whether “'tis better to have loved and lost, than never to have loved at all”.  Status quo bias and anchoring effects should come as no surprise, considering sayings like And “A rolling stone gathers no moss”, “Don't rock the boat”, “Don't upset the apple-cart” , “Don't change horses in midstream”, “Better safe than sorry.” At the same time, the sentiments of the over-confident are summed up in sayings like “All's for the best in the best of all possible worlds”, “Every cloud has a silver lining”, “Faint heart never won fair lady”, “Faith will move mountains”, “Fortune favours the brave”, “He who hesitates is lost”, “Hope springs eternal”, “In for a penny, in for a pound”, “Lightning never strikes twice in the same place”, “Nothing venture, nothing gain”, “Third time lucky” etc etc. but even here, proverbs provide ample warning with “Don't count your chickens before they are hatched”. In an application to family economics, whilst proverbs recognize that many believe that “Marriages are made in heaven”, they warn that “Marry in haste, repent at leisure”.

Peer effects
As for the struggle with identification to find peer effects  - surely the sheer amount of proverbs are enough to suggest that these really exists? “A person is known by the company he keeps”, “There's safety in numbers”, “When in Rome, do as the Romans do”, “If you can't beat em, join em”, “If you lie down with dogs, you will get up with fleas”, and “Imitation is the sincerest form of flattery”, although it could be a case of “Birds of a feather flock together” and “Great minds think alike”. An interesting research agenda would be whether peer effects are stronger in positive domains as suggested in: “Laugh and the world laughs with you, weep and you weep alone”

Time discounting, will-power
Everything in the proverbial world seems to confirm research on the human tendency for present focus, with may proverbs actively encouraging people to think of the future “An apple a day keeps the doctor away”, “A journey of a thousand miles begins with a single step”, “As you make your bed, so you must lie upon it”, “As you sow so shall you reap”,  “An ounce of prevention is worth a pound of cure”, “A stitch in time saves nine”, “Everyone wants to go to heaven but nobody wants to die” ”Make hay while the sun shines”,  “Never put off until tomorrow what you can do today”, “Procrastination is the thief of time“. Patience too is actively encouraged in sayings like “All good things come to he who waits”, “Patience is a virtue”. On the other hand, some proverbs do seem to advocate present focus, “There's no time like the present”, “Carpe diem”, “Eat, drink and be merry, for tomorrow we die”, “Live for today for tomorrow never comes”, and “Shrouds have no pockets”. Recognizing the dilemma that presents itself proverbs offer other wisdom such as: “It's never too late”, “Time flies”, “Time is a great healer” and “Time will tell” and quite simply, “A watched pot never boils”.

The struggle with will-power receives a lot of attention in sayings like “Do as I say, not as I do”, “Failing to plan is planning to fail”, “If you can't be good, be careful”, “No pain, no gain”, “The road to hell is paved with good intentions” and “There's many a slip 'twixt cup and lip” “Where there's a will there's a way”, and “ If at first you don't succeed try, try and try again” and “Rome wasn't built in a day”.

Recall, mental categories, emotion
The tricks our mind plays with recalling past events is evident in sayings like “All's well that ends well”, “distance lends enchantment to the view”,  and “Absence makes the heart grow fonder”,  though why proverbs suggest that “Hindsight is always twenty-twenty” is not yet clear (though it certainly is an assumption made in most studies). The joys of savouring are also explored in “It's better to travel hopefully than to arrive”.

That people have issues with mental categories seems evident in sayings like “A place for everything and everything in its place”, “Penny wise and pound foolish”, and “Take care of the pence and the pounds will take care of themselves.”  Visceral effects are captured in sayings like “The way to a man's heart is through his stomach”, “Love is blind”, “Love will find a way”.

Even happiness research found what proverbs had told us all along, that “Money isn't everything”, and “The best things in life are free”. We knew all along about relative effects as “comparisons are odious”, “Ignorance is bliss” and “The grass is always greener on the other side of the fence”.  The financial crises itself was forecast in “He that goes a-borrowing, goes a-sorrowing” and “Give credit where credit is due”.

System 1 and System 2
The notion of System 1 and System 2 thinking is captured so elegantly in “One half of the world does not know how the other half lives”, “There are two sides to every question”, “Every stick has two ends”, System 1 operates on sayings like “First come, first served”, “First impressions are the most lasting”; System 2 employs other sayings like “Doubt is the beginning not the end of wisdom”, “Fools rush in where angels fear to tread” “It's no use locking the stable door after the horse has bolted”, “Look before you leap”, The effect of distraction is also summed up in “When the cat's away the mice will play”. What remains to be researched is whether “No man can serve two masters”, or “Two heads are better than one”.

Demographics and Intervention
Some proverbs also reveal correlation between demographics and behavioural findings, such as:  “Boys will be boys”, “A good man is hard to find”, “Behind every great man there's a great woman”, “The female of the species is more deadly than the male”,  “The husband is always the last to know”, “There's no fool like an old fool” and “You can't teach an old dog new tricks”, seem to substantiate much of what peer-reviewed research has found to date. The nature vs nurture debate remains unresolved in proverbs as it does in the research. Is it “Like father, like son”, “The hand that rocks the cradle rules the world”  or “is Life is what you make it?” Proverbs suggest that “The good die young”. To date, this runs counter to most findings in behavioural economics.  

The ethical debate on choice architecture is informed by “Give a man enough rope and he will hang himself”,  “A man who is his own lawyer has a fool for his client” and “The price of liberty is eternal vigilance” Yet proverbs cast a pessimistic view on the possibility of de-biasing behaviour: “It is easy to be wise after the event”, “You can lead a horse to water, but you can't make it drink”, and “A leopard cannot change its spots.” A glimmer of hope may yet exist, as suggested by “You are never too old to learn.” At least “fore-warned is for-armed.”  Ultimately “What can't be cured must be endured”.

An agenda for future research
Proverbs also provide us with a research agenda for behavioural economics. Do we use other – as yet under-researched - heuristics that lead us astray like “If you want a thing done well, do it yourself”, “That which does not kill us makes us stronger”; “All you need is love”; “A new broom sweeps clean”; Is “All publicity is good publicity” or do we believe that “Still waters run deep”? Do we have different rules of what is “fair in love and war”? Do we behave as though “Blood is thicker than water”? Do we have a tendency to “Throw the baby out with the bath water”? Does “Early to bed and early to rise” really make a man “healthy, wealthy and wise”? Under what conditions is “Hard work never did anyone any harm” true? Does “Life begin at forty”?  Is “Necessity is the mother of invention?”, in risky decisions, are we “Once bitten, twice shy”? 

No comments: