Homo Economicus

Trust, above all things, was what Charlotte valued. It was what had kept her for over twenty years at the small Manhattan publishing firm that had hired her soon after she had graduated from City College. She trusted, in spite of the dismal rate of pay, that they truly believed she had the makings of a first rate fiction editor. It was trust that was the indispensable glue for any durable, authentic relationship and it was exactly the missing ingredient that explained the ultimate failure of her first marriage. It was what had emboldened her, only a week after she had opened up her first savings account, and against all her normal cautionary instincts, to invest in Pax World. After all, she had proudly told me, thirty-seven years ago this had been the first company to introduce socially responsible mutual friends in the United States. And for nearly twenty years Pax World had repaid her trust, slowly but inexorably, seemingly managing itself, more reliable and trustworthy than any single person she had ever known.

So she could not have been more dumbfounded and felt more blindsided, shortly after September 15, 2008, when — goaded by the financial panic that was tearing through the country and nervously realizing she simply did not know the current value of her investment — she decided to check her portfolio.

As Charlotte would tell me:

“In one fell swoop I had lost twenty thousand dollars of what essentially is my life’s savings! I couldn’t believe it. Don’t panic, think long term not short term, eventually the market goes up. That’s what I believed, that’s what they always told me, that was my mantra. ‘If you sell now,’ the woman at my bank whom I trust, gently warned me, ‘You’ll lose a lot of money. Sit tight, let’s see what happens.’

“But sitting tight meant losing over a thousand dollars a day and, try as I might, I just couldn’t do it. After only five days of seeing the investment that had been my rock for twenty years continue to sink like a stone, I hit the panic button. Amazingly, with just one phone call, one electronic transfer, I was able to place all of my remaining savings into a permanently FDIC insured, money market account. I can breathe again . . . but lately I am beginning to second guess myself. What do you think? Will I realize one day that I made a terrible mistake?”

I know nothing about financial investments, have never been a player on the stock market, but I did not hesitate to tell Charlotte that, in her case, I felt she had made a sound decision. Her case, of course, is that of someone who, though not impulsive, is prone to anxiety, has trouble waiting, expects little from life, and gets easily discouraged. The lynchpin of her momentous financial decision was her astute realization that no amount of money could be worth the agony she undoubtedly would suffer if she literally had to wait years to recoup her devastating initial losses. The almost instant comfort she derived from her knowledge, following the transfer, that what still constituted the bulk of her life savings was now and forever safe, confirmed the legitimacy of her choice. To just sit tight, no matter what, and think long term might be, all things considered, the best of all possible strategies for the market as a whole. It might be the strategy of choice for the best and the brightest of investors, but it was a terrible strategy for a delicate soul and a chronic worrier like Charlotte.

And therein lies the crux of much of what is wrong with traditional economic theory. Ever since John Stuart Mill there has been an abiding belief that Homo economicus — “Economic Man” — is a creature compounded essentially of rationality, self-interest and free will. Whenever possible, we will make decisions that affect our own best interests as logically and efficiently as we can. It has only been with the rise of the new field of behavioral economics that the idea — known to psychotherapists for at least a century — that people are often irrational, has begun to be even considered.

The MIT economist, Dan Ariely, is a leader in this burgeoning field. His surprisingly readable, best-selling book, Predictably Irrational, is chockfull of imaginative and highly practical applications of behavioral economics to the vicissitudes of everyday life. His unique way of combining shrewd psychological insights with deceptively simple but ingenious economic experiments intuitively rings true. He makes the point, over and over again, that human behavior, despite our best intentions, is often irrational. By irrational Dan Ariely seems to mean what cognitive scientists mean: whatever falls appreciably short of the gold standard for rational decision-making — efficient maximizing of your benefits-over-cost ratio — is irrational. The discovery that continues to rock the world of behavioral economics and is considered so revolutionary is that people, once you scientifically examine their behavior, turn out to be “predictably irrational.”

From our standpoint, the cognitive psychologist and behavioral economist are making two critical, unexamined assumptions here, both of which are unsubstantiated: (1) that whenever possible, we should make decisions like computers do; and (2) that we can, at our best, make such decisions. From our standpoint, once you use the real time model of how people behave — how they make decisions in the real world — an intriguingly different picture emerges. Yes, people are often irrational, but not in the same way, and not for the same reasons, as when judged against the computational standards of an impersonal computer. Yes, goals are pursued and decisions are made, but often unconsciously. And never as therapists do we see people who announce, as their presenting problem, that they wish to maximize their benefit/cost ratio vis-à-vis some pressing problem. Even the professionals, or especially the professionals whom we see in therapy — financial advisors, stockbroker analysts, computer experts — do not do this. It was instructive during the current stock market crash and when the bubble burst at the end of the 90’s, how little these experts were motivated by the traditional economic model, how quickly they gave way to panic and how much more was at stake than the health of their portfolios.

In what follows, I show how much more complex so-called irrational behavior looks when viewed from a psychodynamic standpoint.

It’s All Relative

Somewhere in the beginning of his book, Dan Ariely challenges the reader to “think quick”: which would you choose — a ten dollar free gift certificate or a twenty dollar free gift certificate for which you first have to pay seven dollars? If you chose the free $10 certificate you did what most people do. You also chose irrationally, according to Dan Ariely. Irrational because a moment’s thought shows that $13 (20 minus 7) is a better deal than $10. Irrational, because all things being equal, it is mathematically impossible that 13 is not greater than 10.

But all things are not equal between the two choices. From a psychodynamic standpoint, there is a considerable difference between being offered something for nothing and being asked to first pony up $7 in order to get something presumably greater down the road. For suddenly the element of risk has entered the picture. How do you know, if you pay the $7, you will receive the free twenty dollar gift certificate? Or that, if you do receive the twenty dollar gift certificate, it will prove to have been worth the trouble to write the check, the waiting period that is entailed, and the effort you must now make to at last redeem your investment? Whereas, by contrast, if you accept the free ten dollar certificate, there is nothing to do. If you’re not up to redeeming it, or if there’s nothing particular you want to buy, you don’t have to. In one state you are as passive and free as you want to be, in the other you are required to act.

Or consider this: You are looking at an ad featuring three different vacation sites, at three luxurious hotels, at roughly the same rates. First is a trip to Paris. Second is a trip to Paris, but minus the free breakfast. Third is a trip to Rome. Which do you choose? Overwhelmingly, people choose the first hotel, the trip to Paris, which happens to include a free breakfast. This, according to Dan Ariely, is exactly the one the marketers and designers of the ad wanted you to choose, the other two hotels in this example serving merely as “decoys.” Decoys, because marketers already know that when consumers do comparison shopping, they typically like to start with easy comparisons. So they slyly insert two other hotels — the Paris hotel without the free breakfast, and the nondescript hotel in Rome — to create an allure of comparison that is really bogus. Bogus because the three hotels all have similar decors and trappings, with the only distinguishing feature being the free breakfast in the first Paris hotel. Because you are unconsciously tempted to make the only easy comparison available — that, all other things being equal, a hotel in Paris which offers a free breakfast is preferable to a hotel in Paris which does not — you wind up purchasing the vacation plan that the marketer all along wanted you to buy. And that, according to Dan Ariely — to purchase an expensive vacation at a Paris hotel, on the basis of a free breakfast — is nothing if not irrational!

Irrational, that is, provided we look at the transaction solely from the insider perspective of the economist, the accountant or the bookkeeper. But what about the perspective of the ordinary person in the real world, to whom the prospect of a vacation in a Paris hotel with a free breakfast — if that is all he or she really knows — may sound pretty appealing? Remember we cannot assume that the consumer knows what Dan Ariely and the marketer knows, that there is a joker (the decoy) in the ad. The consumer is right to start out with good faith, to begin by trusting that the ad means what it says, that the three featured hotels, although different, are roughly equal in value, equally deserving of trust and she has only to exercise her subjective preference. She is right to assume she is not being set up with a decoy. She is right to start with an easy comparison — should she start with a comparison that is too difficult to make? If this is true, what is it then that the comparison is telling her? Viewed from a psychodynamic standpoint, it may tell her, perhaps, that the reason the first Paris hotel is offering a free breakfast is because it tries harder, it is more service-minded and more eager to please. It may tell her the reason the second hotel in Paris is not offering a free breakfast is because it is greedier. Or the reason the hotel in Rome is offering nothing for free is because it is not up to snuff and cannot compete with the others. Or it may tell her none of these things. It may be that the first hotel is offering a free breakfast because it is less successful, attracts less tourists and needs a gimmick. It may be that food in Paris is cheaper than in Rome and therefore easier to give away. While any or all of these scenarios may be equally plausible, the fact is that the ad provides specific information, gives a concrete example that applies only to the first Paris hotel, the vacation plan it is aiming to sell. The marketer, with the help of a covert manipulation, lulls the consumer into falling for an easy comparison. Is it naive or irrational for a consumer to respond this way? Only if you expect that the consumer should somehow have figured out that — beneath the bland appearance of the ad — a deft marketing con game was afoot. But if you grant the consumer the right, as I do, to assume the ad is in good faith, until proven otherwise, you have every reason to initially believe that the offer of a free breakfast may indicate the possibility of a better deal.

Anchoring

Behavioral economists like Dan Ariely are struck with the power of first impressions when it comes to price setting. They note that, “although initial prices are ‘arbitrary,’ once those prices are established in our minds they will shape not only present prices but also future ones.” This makes them “coherent.” It is also what makes them an economic anchor. It is why Dan Ariely likens the power of initial prices to endure to the power of imprinting: Konrad Lorenz’s celebrated discovery that goslings, soon after their birth, become attached to the first moving object they encounter. If that irresistible object turns out to be a human being — as it was in a very famous experiment in which Konrad Lorenz substituted himself for the goslings’ mother — they will proceed to loyally follow him throughout much of their lives. With characteristic boldness, Dan Ariely poses the question: Could the human brain, therefore, be “wired like that of a gosling?”

The therapist, unlike the behavioral economist, does not dwell on the pivotal decision impelling a person to purchase an object. The therapist picks up the story — the story of the person’s relationship to the object — where the economist leaves off, which is usually at the beginning. For the economist, once the buyer’s remorse has been successfully overcome, the story ends. But the therapist knows what it is like for a person to live for a very long time with a product, to be surrounded by them, possessed by them, to identify with them, to dream about them.

Behavioral economists, by contrast, seem intoxicated with the allure of the first impression. They underestimate the power of the unconscious to select the first impression. They forget that a hundred different people exposed to the same situation will have a hundred at least slightly different first impressions. If this is so, the question becomes why does a person select — out of thousands of possible descriptions — just one? And a psychodynamic answer might be that certain unconscious characterological traits — either aroused or threatened by the novelty of the encounter — are stimulated to register their vote: approach or withdraw. In this sense, to expect each succeeding impression to supersede or correct the first impression would be like expecting each succeeding time you watched a particular movie or heard a song to somehow come across as a different experience.

Traditionally, the mantra of the marketer has been that people are a federation of stimulus and response hot buttons that in themselves can be arbitrary and meaningless. It has been the innovation of behavioral economists like Dan Ariely to add for the first time a pinch of common sense folk psychology to the mix. As he points out, not all first impressions endure, some are changeable. From the psychodynamic point of view, this is because all first impressions can be subdivided into a combination of primary and superficial qualities. Primary qualities would tend to be more chemical; how, for example, you rated someone or something on the beauty to ugliness continuum; would involve fundamental needs such as the need to feel safe with another person; or basic values, such as whether instinctively you admire someone or not; or issues of self-esteem (such as does the person make you feel worthy or not); or characteristics such as the degree of genuine likability, apparent warmth; attentiveness to your inner self; compatibility and so on.

One of the biggest reasons our initial impression of others changes is simply because people are so complex they could not possibly, even if they wanted to, reveal all of their salient personality traits in one fell swoop. And, in point of fact, they go to considerable lengths to mask what they consider their least attractive and most negative traits: typically, their capacity for rage, for mean-spiritedness, for envy, for untrustworthiness and so on. Viewed this way, we immediately see one obvious reason why first impressions tend to last: they are based on those qualities in a person that we think are least likely to change.

Arousal

Imagine being an eighteen-year-old male, heterosexual Berkeley student responding to a campus ad seeking participants for a study on “decision making and arousal.” You are told the experimental sessions would require about an hour of your time for which you would be paid $10 a session and that the sessions would involve sexually arousing material. Questions would be delivered through a specially coded computer. One set of questions would deal with sexual preferences: Do you find women’s shoes erotic? Could you imagine being attracted to a 50-year-old woman? Could you enjoy having sex with someone you hated? Could you enjoy being tied up or tying someone up? A second set of questions would ask about the likelihood of engaging in immoral behavior such as date rape. A third set of questions would ask about the likelihood of engaging in behavior related to unsafe sex.

That was the first part of the experiment, supposedly conducted in a cold, dispassionate state. In a second, critical part of the same experiment, conducted a few days later, test subjects were to meet with the same experimenter. Although the questions would be essentially the same as before, you were asked to sign a consent form. This time, you were to get yourself into an excited state by viewing a set of arousing pictures (on the computer) and masturbating. You were to arouse yourself to a high level, but not to ejaculate. At which point, you were to answer the questions.

No one I think will be surprised that the answers given in the aroused state were significantly more permissive, libertine, and daring when it came to conventional taboos. Based on these results, which were consistently arrived at, Dan Ariely concludes that people — people in general, not just 18-year-olds — tend to be poor prognosticators when in a dispassionate state, of what their sexual behavior would be when they were aroused.

From the psychodynamic standpoint, needless to say, such a conclusion is hardly warranted. Dan Ariely is assuming that the answers given in the second experimental session, with the subjects at peak arousal, are a better indicator of what they would do if faced with the actual situation. He does not seem to consider that his very excited subjects — who, after all, will face no consequences for whatever deviant behavior they happen to be contemplating — may be seriously overestimating what they would really do in circumstances in which they would be held strictly accountable. The fact that there is a significant difference between the two sets of answers does not tell you what the difference means. Dan Ariely is putting an awful lot of faith in the reliability of eighteen-year-old college students who are trying to earn ten dollars for an experimental session with a computer and perhaps to have a little fun along the way.

Here then is a different psychodynamic explanation that suggests itself. It may be that cold, dispassionate, unaroused students are motivated to underestimate or deliberately play down what they might do if aroused. After all, does it make sense to be totally frank, to reveal everything to a total stranger in an even stranger test? Conversely, isn’t it understandable that someone, when genuinely aroused — as, for example, when intoxicated — or when nearly orgasmic — would be inclined to be more reckless? Such a person may be simply giving vent to some long-held libidinous fantasies. Sex with someone I hate? Why not? Turned on by a shoe? Who knows? Engage in bondage games? Might be fun! Such a person may be doing the very opposite of honestly attempting to predict their behavior in an aroused state.

In short, Dan Ariely, in a fashion characteristic of the behavioral economist, has relied upon a tightly controlled but almost comically contrived situation in order to reach a sweeping generalization about the behavior of real people in real time in the real world. Nevertheless, despite that basic psychodynamic reservation, Dan Ariely in Predictably Irrational raises a wealth of intriguing questions:

He wonders why, for example, we persistently tend to “overvalue what we have.” Struggling to introduce a psychological dimension, he suggests that is because: (a) owning something entails a certain set of experiences and perspectives that make it difficult to imagine what life would be like without it; and (b) we wish to avoid the mourning we believe would be triggered by its loss. Although true to a certain extent, Dan Ariely, like most economists, does not seem to appreciate that the relationship we have to a product is more important than the price of the product. That ownership is essentially about experience (which includes the experience of the product’s price fluctuations). Like other behavioral economists, he tries to assign numbers to qualia that are essentially experiential, and then use these numbers to construct a putative, bottom-line, determinative database. Needless to say, from a psychodynamic point of view, the resulting equation between a person’s experiential qualia and numbers arbitrarily assigned by an economist — like the proverbial comparing of apples and oranges — does not hold up.

To economists such as Dan Ariely, however, it makes sense to trade in what we have, if what we have has outlived its usefulness or if we can get something comparable at a better value. Not to do so, is simply irrational, a failure to understand or to deal with the cynical realities of the marketplace. Here in a nutshell is the mindset of the economist: ownership is about value; value is about benefits; benefits are about quantitative units. From such a point of view, to appraise a person’s possessions is not unlike appraising their portfolio. But this is to disregard the manifold array of different meanings that owning something can convey. It overlooks that personal identity is often inextricably bound up with ownership. That ownership can convey a sense of potency, of social standing, of competency, of achievement, of having roots, of good fortune, of all-around desirability, of erotic magnetism. That, conversely, loss of ownership can convey a diminution of power, of the ability to defend and hold on to what is rightfully yours, a costly failure to keep up with the changing times, a sign of surrender, a retreat from the battlefield of life.

Gerald Alper

Author

God and Therapy: What We Believe
When No One is Watching