consumer choice theory and “goal-oriented behavior”

There’s got to be a better way!

Sure, there’s Behavioral Economics, but as one recent lecturer put it, the field is an adjunct to standard Microeconomics, not really an indictment of it. Yet, over and over again, I want to just indict it.

Consumer choice theory does not seem to have a lot to say beyond “give someone all the resources and let them choose what to do and that will be the best outcome, QED.” That just doesn’t seem to be a very useful way to look at the real world we live in. That is, unless you would like to have a world where anything but unfettered choice (really even without being “forced” to know too much information) is bad thing. Then it works really well. Which says a lot about with whom such analysis is really popular.

If this is all a lot of gobbledygook, I recently saw a documentary that gives a pretty good overview of what I’m talking about here. It’s a bit given over to hyperbole, but if you A) listen past the dramatic apocalyptic symphonic music and B) realize that the conflict between standard uber-rational choice economists is one of degree rather than of kind (as portrayed in the doc), a lot of the basic problems with micro and the related work of behavioral economists is reasonably well-explained for a TV show. It’s a NOVA episode, “Mind Over Money.”

At any rate, what this post is apropos of is a bit in my Microeconomics text which is looking at excise subsidies (such as a health care tax credit, i.e. the govt gives you credit towards the amount you’d have to pay in taxes based on what you spent on healthcare). The book uses the obligatory shifting budget lines and indifference curves like the example below. What these exercises have in common (the example here is showing how school vouchers tend to make everyone better off versus the public provision of schooling (a sort of “total” excise subsidy) is that they invariably manage to say something along the lines of “just give the consumer the money and they will make the same good decision, but they will “feel like” they are on a higher indifference curve (this is econ-speak for feeling like you got a better deal out of the situation).

Here’s what I’m talking about (and no offense to this professor’s extra tutorial bit that I pulled this from, it certainly helps with the Browning-Zupan text which is one of the driest I have yet encountered. I would not mind having this fellow to give me some extra ‘splaining.).

What the health care example in my book purports to show with consumer choice theory and the associated assumptions of rational consumers (or “goal-oriented” as Browning and Zupan choose to say), non-satiation, monotocity, etc. is, you guessed it, that the government would be making consumers better off if it just gave them the cash. See, they would then spend just as much on health care as if it was subsidized (because according to rational-choice types, though people may not have everything all ranked and figured out in their heads, they “act as if they do” to use the crucial enabling caveat, and that is good enough for these folks). Except that they wouldn’t buy healthcare with it. Some things just need a little nanny state*.

You can watch the NOVA to see some of the set pieces of behavioral economics addressing the many shortcomings of this type of analysis, it covers most of the classic “gotcha” scenarios (mug endowments, bubble behavior among sellers, not disregarding sunk costs, etc), OR you can just read this:

Despite the growing need for employees to save for retirement, a significant number of workers participating in 401(k) plans “cash out” of them once they leave their company, according to new research by Hewitt Associates, a global human resources services firm.

Hewitt’s study of nearly 200,000 workers who participate in their 401(k) plans found that 45 percent elected to take a cash distribution once they left their jobs. The remainder either kept their savings in their current employer’s 401(k) plan (32 percent) or rolled the money over to a qualified IRA or other retirement plan (23 percent).

I don’t care how you slice it, this is not “rational, goal-oriented” behavior. It’s just people making bad decisions. I know because I’ve done it!! More than once! It took a lot of years of getting wiser and a lot of years of acquiring financial literacy skills to stop doing it. I’m sorry Browning and Zupan, but giving people money as a lump-sum transfer and assuming they will buy the same amount of health care with it as a tax credit is just ludicrous, I don’t care which indifference curve you end up on.

There has to be a way to describe what people really do in some more meaningful way than building a bunch of toy models of consumer choice and then putting a bunch of asterisks behind it with behavioral econ. What kind of macro models can you build on “foundations” like this?

Okay, back to the Kool-Aid.

*To be fair to Browning and Zupan, they do go on to say that this sort of exercise shows that people will be better off only “according to their own preferences,” but it is this sort of axiomatic observation that makes me think that this is a lot of hand-waving and graph-drawing to say that people do things because they thought it would be a good thing for them to do.

(Update. There’s also this from Modeled Behavior. Winning the lottery as the best strategy to accumulate several hundred thousand dollars. Enjoy.)

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About theunlikelyeconomist

theunlikelyeconomist is in the midst of the long slog to attain a PhD in economics.
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