Monday, January 18, 2010

economists and money

This is a pretty hilarious description of economist's unique money habits (via MR). It somehow simultaneously points out how regular humans should be more like economists, and how economists should be less lackadaisical about disregarding social customs that they don't understand within their theories.

On the first point, economists usually understand the underpinnings of prices and aren't fooled by the exploitative gimmicks. I would take John Siegfried's lead in paying less for a black car, and Paul Kasriel's in buying off-brand shoes. They know that companies often sell identical products with a different label as a form of indirect price discrimination, and a brand name label on your prescription bottle won't make you feel hundreds of dollars better. And even if Nikes are slightly better quality than other brands, that difference is hugely exaggerated in the pricetag, where you're paying for the Swoosh itself.

Economists are also less subject to "mental accounting" and know that switching from Starbucks to home brew really is offset by being able to buy a bigger house or send your kids to college. A penny saved is a penny earned.

On the other hand, economists often forget that money is not the same thing as happiness; you maximize the latter, not the former. Maybe it's true that my time is most profitably spent working on economics, but I'll be much happier if I invest in a diversified time-use portfolio.

And they don't acknowledge that some sources of happiness are just not fungible. I would not advise copying Betsey Stevenson and Justin Wolfers by paying your friends to hire movers instead of helping carry some furniture. Favors between friends can't be bought. (To be more specific, maybe some types of favors can be translated into monetary terms at a discount, but there are cases, this one included in my opinion, where that rate is negative. If a friend tried to buy me moving help, I would be uncomfortable, decline the offer, and perceive that friend as weird, materialistic, and uncaring. Clearly this does not help our friendship in the way trading favors does.)

And, you can't buy quality time. No, don't try to impersonate Robert Hall by hiring help to decorate your Christmas tree. That's not the point.

(In other words, everyone should find a happy medium and become behavioral economists =)