Why Politicians Should Read Kahneman

Daniel Kahneman is a Nobel laureate in economics, and a behavioral psychologist by trade. His specialty is "hedonics" — which is a fancy way of stating that he wonders what makes us happy (and sad) as humans. If you believe that economics is often the pursuit of happiness or pleasure, you can immediately see the importance of Kahneman's research.

Many of us find "pleasure" (emotional reward) in obtaining a perceived bargain, according to Kahneman and other researchers. Unfortunately, what we perceive as a bargain isn't always so. I've known "coupon clippers" who would buy items for "half price" — but these were items they'd never normally purchase. Our reward impulse is not logical and reasonable because it is an impulse, not careful consideration of the variables involved.

Economists used to believe in the "rational consumer" and the "rational seller." Both are statistically accurate in the macro, but at the micro level these theories are flawed. We see the limits of rational thought in economic bubbles, but we also see them in simple bargain hunting.

Kahneman found that people will make an effort to purchase a $15 item on sale for $10. The math is simple and the percentage obvious: "Save 30%!" That sounds impressive and it is if the $5 is not offset by the higher costs of attainment, such as driving a greater distance for the sale price.

But, we don't make the same effort when a $150 item is on sale for $140. After all, the saving is "only" 7%. We don't perceive the savings of $10 as being more than the $5 savings — even though it clearly is more savings in raw dollars. A truly rational consumer would seek out the $10 savings more than the $5 savings. So why don't we feel the same "pleasure" from the greater savings?

The simple answer is something I heard satirist Willie Geist state on CNBC: "People think they understand piecharts. They don't get graphs with all those lines and numbers. Big 3D piecharts, like USA Today prints, are simple."

There you have it. We understand percentages. Big slice of pie versus small slice of pie. The actual size of the pie? We don't instinctively recognize the importance of context. Saving a third of pie? That's impressive. Saving three fortieths? Incomprehensible to most people.

Most modern economists are stuck debating models that assume one of two things:
  1. The consumer and seller are rational, generally, and markets will self-regulate over long periods of time despite minor fluctuations.
  2. The market is unfairly biased towards the deceptive seller, and only the government can help ensure the market functions properly.

Neither is entirely true. The government is operated by… people. This means it is as irrational as the marketplace, if not more so. Federal budgets are still spending and allocating resources. Politicians are as flawed as any other consumers. That is why we hear politicians make the mistake of other consumers: "That (whatever) is only a small percentage of the budget." Piechart thinking. Instead of real dollars, politicians slip into the piechart mentality.

Why would government be even less rational than the free market? Because the financial costs are hidden so well from us as individuals. The politicians turn to percentages when convenient, to real dollars when those are more persuasive. You want something to sound expensive, use dollars. You want a program to sound cheap, use percentages or the "per day" cost to each taxpayer. Politicians use lots of games to make us feel better about spending money.

And government cannot regulate business any better than it manages federal expenditures. Why is that? Because the emotional reward of enforcing laws and "protecting the public" is often irrational. We perceive risks poorly, so government ends up spending time and money regulating actions that aren't that costly overall. We reward politicians for making unreasonable, but impulsively appealing, choices.

Too many imagine government is above and beyond human psychology. In the end, a government of men and women is going to have the same organizational behaviors found elsewhere. Idealists wish it were different, but it isn't. Piecharts win, rational thought loses.

I honestly don't know anything of Kahneman's politics, though I should research the matter. I am impressed with his works, which appeal to my notion that we can't easily model markets because human nature is so illogical.

Many behavioral economists and hedonic psychologists are "liberal" or "progressive" — they seek to tailor political messages and actions in ways that appeal to our impulses. For some of us, this raises ethical questions about manipulating others. But, many scholars argue that all human interactions are "manipulation" to achieve desired goals. I don't agree, but the argument is an important one to understand.

Books you might consult on behavior and economics:

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