A sideways look at economics

I’ve always enjoyed a good story. As a young boy I loved mythology and epic tales in all their forms. I liked to decipher their hidden meanings, unpick the allegories and catch a glimpse of how the societies, values and norms of those times differed from today. Or, indeed, how they didn’t. As I grew up, this fascination morphed into a passion for history and economics as gateways to a life-long journey of self-discovery; of learning about the drivers of my curiosity, incentives, beliefs, weaknesses and ultimately happiness.

There is one myth, however, that I had always found excessively simplistic despite its prominence: the biblical tale of Adam and Eve, and the circumstances leading to their banishment from the Garden of Eden. When I was a kid, I remember asking myself: how small exactly was this Garden of Eden? I could have understood God’s warning to Adam and Eve to stay clear of the forbidden fruit, if the apple tree were the only tree in a very small garden. However, the garden must have been of some considerable size, given we know that there were animals, rivers, lakes and other amenities. In this case, the odds might have been in Adam and Eve’s favour if they had never known about the existence of that specific tree. I would expect an omniscient and benevolent God to grasp at least the basics of probability theory. Moreover, it seems pretty obvious to me that a human being, prone to getting bored, and with a well-developed sense of curiosity, would do precisely the thing that he was expressly told not to do. I’m no God, but I do have children, and I could clearly see this coming.

I struggle instinctively to harbour negative feelings towards Adam or Eve, even if they did ruin things for the whole of humanity. Rather, I’ve tended to feel sorry for them. In fact, I did wonder if they might have been set up to fail; as if God grew bored of their presence as we might with a friend who overextends an invitation to stay. Or perhaps I failed to grasp their incentives and preferences correctly. Maybe they were the ones that grew tired of it all and figured out that pain and ultimately death were prices worth paying to escape a life of perennial boredom. In a nutshell, it always bothered me how little I could relate to this story, and how it left me with more questions than answers.

As I’ve grown older, but not necessarily wiser, I’ve started to empathise more with Adam and Eve’s experience. As my fascination with behavioural economics and psychology have continued to grow, I’ve increasingly come to respect this story as an allegory, and a template for the complexities and biases associated with decision-making — specially around life choices.

Irrevocable, very polarised and binary decisions can be extremely demanding, from a psychological perspective, even before we take into account uncertainty about the future. Going vegan every January or giving up alcohol for a month are interesting challenges, but hardly demanding in the grand scheme of things. However, imagine how strong your preferences would need to be to permanently and irrevocably commit to either consuming sweet or savoury foods for ever. Even a person with a very sweet tooth would need to assess how his or her preferences might mutate when facing a permanent abstinence from savoury foods. These types of decision are far more common than many people realise: choosing a career; trading off a reduction in pay for a job that is more rewarding in other ways; choosing a partner for life; having kids; moving away from your home country; picking a subject at university. I could go on. Regret theory is one fascinating strand of economic thought that developed in the 1980s.[1] It seeks to generalise expected utility theory by allowing the utility experienced in following a chosen path to be adversely affected by the scale of the rewards that would have been afforded under the opportunity foregone.

We suffer regret when clarity about what would have been for the best appears only after a decision has been taken irrevocably. Arguably, it would be hypocritical to pin too much blame on either Adam or Eve for their expulsion from the Garden of Eden, as they did not have full clarity regarding the true costs and benefits of eating or not eating the forbidden fruit. They made a decision using all the information available to them, according to their preferences. Regret is portrayed as their shame on discovering that they were naked, but it ultimately related to their acceptance of the consequences of their actions. A trait too often overlooked as a quality in people.

There is one aspect of regret that makes me outright sympathise with Adam and Eve’s choice. Various experiments have proven that the actual psychological scars from regret are much shorter lived than assumed prior to the experience of regret. To economists, this finding suggests that, while regret is an irreducible forecast error with real costs, the overestimation of anticipated regret is an unnecessary bias that should be avoided. Psychology encourages us to do this by understanding how we make sense of things, and by tweaking our emotional system.

Rule number 1: in our quest for happiness, we should stop setting rigid goals and objectives, such as retiring by a particular point in time, or accumulating a certain amount of wealth. Although still difficult, it’s far better to forecast our own feelings in different circumstances, and then pursue those objectives that have the greatest chance of making us happy. Hume figured this out in his Treatise of Human Nature, when he famously observed that: “Reason is, and ought only to be the slave of the passions, and can never pretend to any other office than to serve and obey them”.

More recently, Wilson and Gilbert[2] formalise the notion of ‘affective forecasting’ and provide a great breakdown of how this process works, together with its potential pitfalls. They find that people are generally good at judging what makes them happy, but they sometimes underestimate the complexity of an event, or the predominant emotion that they are likely to experience. People’s emotional forecasts are found wanting in particular when they try to assess the intensity and duration of emotional reactions. As in the case of anticipated regret, we systematically overestimate the duration of our emotional reactions to future events, such as the persistence of the contentment we might feel when a favoured team wins a match (spoiler alert: it’s a lot more fleeting than you think). In response to negative or disruptive events, we go through a process of rationalisation that reconstructs and interprets events in ways that minimise their impact. For example, it’s likely that Adam might have alleviated his regret by pretending that he would never have given in to temptation had Eve not passed him the fruit — literally, the oldest excuse in the book. Interestingly, we tend to do this by resorting to expedients such as the promotion of beliefs in external agents or notions of absolute truths — ‘it was fate’ or ‘it was morally the right choice’.

Rationalisation processes are triggered both when dealing with the consequences of a choice after it has been made, and before. The latter case is particularly harmful, as we close the door to opportunities that might maximise happiness by creating artificially inflexible circumstances. This last part in particular resonates with me, as it explains why we spend an inordinate amount of time trying to talk ourselves out of doing things that would arguably bring us more happiness, at the risk of a probably exaggerated regret. At the very least we should strive to rebalance, and to refocus our rationalisation techniques so that we talk ourselves into doing things. As such, I salute Adam and Eve for not falling prey to this bias, and for being true trailblazers. They embraced the uncertainties of life and secured a different kind of immortality — possibly a significantly more interesting one than the alternative.

Bob Marley’s rendition of ‘Don’t worry be happy’ would perhaps be a good soundtrack with which to close this week’s TFiF. However, if you have made it this far, you deserve a jolt. I suggest bashing out the aptly named ‘Satan’ from electronic kings Orbital. Pay particular attention to the intro:

“Daddy? Yes son! What does regret mean? Well son, a funny thing about regret is that it’s better to regret something you have done than to regret something you haven’t done…”.

I can vouch for this.

 

 

[1] For an excellent review see: Bleichrodt, H, and Wakker, P (2015) ‘Regret Theory: A Bold Alternative to the Alternatives’, The Economic Journal, Volume 125, Issue 583, pp. 493–532.

[2] Wilson, T, and Gilbert, D (2003), ‘Affective forecasting’, in Zanna, M. (ed.),  Advances in experimental social psychology, Volume 35, pp. 345-411.