People are fascinating. They smoke, take drugs, gamble, have unprotected sex (not necessarily in this order), procrastinate, become shopaholics/chocoholics [just google how many people blog under the name of “Chocoholic”]/ and all other sorts of -holics, fail to use hands-free mobile phones in cars, keep on dieting “tomorrow” [sounds familiar?], skip their regular medical check-ups, fall prey to biases (see a simple list here) and logical fallacies and do not give a damn.
Two months ago, I launched a questionnaire that was supposed to test to what degree are we subject to the sunk cost fallacy (explanation here). When I saw the results, I could not believe my eyes how irrational we are. Two examples:
First, I asked the participants whether they would stay in a cinema if the first 15 minutes of the film were extremely boring. Almost 40% of respondents said that they would, “because they have already paid for the ticket”.
Do you see the irony there? They did not expect the film to get better, they didn´t want to stay and enjoy the company of someone, they didn´t want to leave and do something they would enjoy more (although all these rational options were on offer). They just felt that if they didn´t sit in the cinema for the two hours, they would have wasted the money. (As if they didn´t waste it at the second they paid for the ticket, ignorant of the fact how bad the film was.)
Second, the question was along the lines of: “Imagine that you are an owner of a firm. You are building a factory A which has so far cost you 10 billion. If you wanted to finish it, you would have to pay additional 10 billion. Alternatively, you could abandon this building and buy factory B (equivalent to factory A) for 9 billion. What will you do?”
69,5% of respondents answered that they would finish building the old one. Do you see the problem? This should have been a simple mathematics question (10 > 9, hence option B is cheaper, yay!), but it turned out to be the question with the highest percentage of “irrational” answers (please ignore the squabbles about the proper definition of this word, let´s stick with the intuitive definition “irrational decision” = “stupid”).
You say “Fine, but that is not that important – who cares about sunk cost, anyway?”. Well, another example: Yesterday I was reading Predictably Irrational by Dan Ariely when I came across the results of his survey on the effect of arousal on our decision-making. Or, to be more precise, on male decison-making. So while only 5% of nonaroused men would “slip a woman a drug to increase the chance that she would have sex with [them]”, 26% of aroused men would do so (420% increase). Or while 88% of nonaroused men claimed they would use a condom if they didn´t know the sexual history of a new partner, only 69% of aroused would (22% difference). Scary, if you ask me. And worrying. Not just the numbers themselves, but also – as Dr. Ariely himself points out – the degree to which people underestimate their reactions in a less-than-cold-blooded state of mind.
The problem is that – unlike in many other cases – education doesn´t seem to be the cure. As I was skimming through my data on the sunk cost fallacy, I noticed that the level of attained education did not affect the results significantly. (Funnily enough, even the people who have an Economics degree and know exactly what “sunk costs” are ticked the “irrational” options.) Interestingly, age, income and nationality seemed to play a bigger role (the older and richer you are, the more likely you are to avoid this particular logical fallacy – and preferably, you should be European).
At the end of my musings I came to two conclusions: A) Behavioral economics deserves more attention in classes, perhaps as early as in high school. Chances are, if you warn people early enough how many and which mistakes someone else has made (and WHY), some of them will not repeat them. Do not teach the kids all bones and parts of our brain in Latin – teach them how human mind reacts to certain states (passions, anger, lust) and how to avoid (or, realistically speaking, significantly decrease the probability of) waking up in the morning in someone else´s bed without a clue what happened the night before. I.e. teach them to THINK and predict better their behaviour. B) Human irrationality should be of greater concern in economic models, because we all at some point do “stupid” things and do not behave in the way economists would like us to behave. No wonder half of all economic models that are taught on the undergraduate level are wishy-washy. Drop the assumptions and be brave enough to say “I only know that I know very little.”