But seriously, folks, what do people want?

• Author: Fried, Barbara H.
• Position: Whether presupposition that consumers' 'true' preference is wealth/consumption maximization or something else - Seventh Annual Conference on Empirical Legal Studies: The Empirical Revolution in Law

INTRODUCTION I. ARLEN AND TONTRUP: THE ENDOWMENT EFFECT AND THE ROLE OF REGRET A. Experimental Design 1. Agents as responsibility diffusers 2. Responsibility shifting through conformity with a group B. Interpreting the Results II. HOFFMAN AND WILKINSON-RYAN: TAKING PRECAUTIONS BEFORE AND AFTER ENTERING INTO A CONTRACT A. Experimental Design B. Interpreting the Results III. So WHAT DO PEOPLE WANT AND WHAT DIFFERENCE DOES IT MAKE? A. Staying Within the RC Model B. Leaving RCT Behind INTRODUCTION

In a lecture he gave at Stanford many years ago, Richard Rorty recounted the following story: A friend, an eminent decision theorist, had to decide between competing job offers from two universities. Unable to choose, he called up Rorty for advice. "Why don't you make one of those fancy decision trees you're always writing about?" suggested Rorty. His friend's response: "Oh, come on, Dick, this is serious."

The story came to mind in reading through the papers in behavioral economics presented at the Seventh Annual Conference on Empirical Legal Studies (CELS). One of the most exciting bodies of work to come out of the social sciences over the last fifty years, the heuristics and biases (H&B) wing of behavioral economics has identified robust patterns in human decisionmaking that undermine many of the core assumptions of rational choice theory (RCT): that we have stable preferences, that we act "rationally" to optimize those preferences, and that utility depends on end states (e.g., total wealth), rather than gains and losses off of a reference point (e.g., of prior wealth).

But RCT and much of the H&B research on consumer behavior share one presupposition, which is arguably more important than all of the ones they disagree about: that the ultimate carriers of utility in consumer transactions are commodity bundles, that consumers' "true" preference is to optimize on those bundles, and therefore that prospect theory and other violations of expected utility theory documented by H&B scholars "must lead to normatively unacceptable consequences." (1) The question I want to raise here is: what if that supposition is wrong? Suppose, for example, that in the typical purchase decision, the consumer's "true" preference is not to maximize some function of wealth (absolute, relative, or changes in wealth measured against a reference point), but instead to minimize the time and mental energy spent on trades, because once she has reached an acceptable level of material consumption at a fairly low level of demandingness, she gets little if any additional utility from optimizing, compared to the other things she could be doing with that time. What difference would that make in how we interpret experimental findings in behavioral economics and psychology?

For RCT, it makes no analytical difference. "True preference," like maximand, has no operational meaning. Optimizing on a choice always means optimizing on the outcome minus the costs of getting there. Once costs are accounted for, the optimal decisionmaking strategy is, in Herbert Simon's words, more appropriately described as "satisficing," meaning settling for a good enough (satisfactory) outcome. (2) Thus, the difference between a consumer who seeks to "maximize" on a toaster, subject to keeping search costs tolerable, and one who seeks to "minimize" the time and psychic energy spent on search, subject to the need to satisfice on a toaster, is just a verbal difference. Mathematically, they are identical decision problems; as long as we hold constant the measure of costs and benefits, we end up at the same place. When academics refer to consumers' "true" preferences, I take it to mean the preference to which consumers give the greatest weight in a given decision; that is the sense in which I use the term here.

Furthermore, RCT is officially indifferent as to the content of consumer preferences and which preference (wealth; consumption; fairness; ideology; religious convictions; or time available to think, garden, or surf the web for porn) dominates any particular consumer choice. In Sam Peltzman's words, all of these possibilities are just "'taste' variables about which economists have nothing much useful to say." (3)

At the same time, RC theorists perceive themselves to have a large professional stake in what those preferences actually turn out to be, and they may well be right. As Peltzman acknowledged thirty years ago, if noneconomic preferences (ideology, etc.) are the dominant influence on consumer (or legislator) behavior, "pessimism about the future of economic versus sociological analysis of [such behavior] would be warranted." (4) Hence, Peltzman's self-described ambition was to "see how much the role of categories like 'political ideology,' which are unfamiliar to economists, can be reduced by simple and fairly crude manipulation of economic categories." (5) In its own way, this is an astonishing admission and gives every reason to regard with skepticism the standard RCT account of human motivation. Yes, division of labor and simplifying assumptions can be enormously valuable research tools, but there's a limit. If your doctor tells you that the pain in your abdomen must be caused by a problem in your ear, because ears are what he knows about, it's time to find a new doctor.

Behavioral economists, in contrast, have no professional stake in the content of our "true" preferences. Their project is to describe consumer behavior accurately and identify the psychological motivations that drive it. They will not be out of a job, whatever those motivations turn out to be. In addition, individual behavioral economists and psychologists have pressed the argument that maximizing on commodity bundles does not necessarily maximize utility, because consumers care about nonmaterial objectives as well, (6) or because the endowment effect and other framing effects, if they persist and affect the experienced utility of a choice, are not cognitive biases but simply part of the experienced utility of that choice; (7) or because treating "sacred" nonmarket goods (e.g., intimate relationships, friendships, work relationships, family, babies, body parts, etc.) as commensurable with money destroys much of their value. (8)

Finally, many of the same people who brought us behavioral economics are a major force in the hedonics literature, which has insisted that any form of utilitarianism worth its name must look beyond RCT's formal axioms of rationality (invariance, dominance, transitivity, etc.) to substantive criteria of rationality, in Daniel Kahneman's words, we must ask "whether choices maximize the (expected) utility of their consequences, as these consequences will actually be experienced." (9) As discussed below, the large and growing body of hedonics research suggests that, once basic needs are met, increased income or consumption levels have at best an uncertain relationship to experienced utility, and that more choice can be bad--not just because we lack the cognitive capacities to process it correctly (which RCT can account for as part of search costs) but because it can lead to greater unhappiness, both during the choice process and in living with the consequences of our choices. (10)

Notwithstanding the foregoing, much of the experimental literature on consumer choice coming out of behavioral economics still defaults to the assumption that the "true" preference of individuals in evaluating potential trades is to maximize consumption, and that that preference accurately predicts experienced utility. In a sense, the discussion that follows boils down to a suggestion that the H&B wing of behavioral economics take more seriously the emerging lessons of its brethren in the hedonics wing. (11)

I use two of the papers on contracts presented at the CELS conference to illustrate the implications of relaxing that assumption: Jennifer Arlen and Stephan Tontrup's The Endowment Effect: Voluntary Debiasing Through Agents and Markets, (12) and David Hoffman and Tess Wilkinson-Ryan's The Psychology of Contract Precautions. (13) In interpreting their findings, both papers presuppose that consumers' "true" preference in evaluating trades is to maximize wealth/consumption. In both cases, they may well be right, at least under experimental conditions, and their results are interesting and suggestive in their own right. In the spirit of a friendly amendment, I suggest other interpretations of experimental findings that are opened up if we take seriously the possibility that consumers' "true" preferences lie elsewhere.

1. ARLEN AND TONTRUP: THE ENDOWMENT EFFECT AND THE ROLE OF REGRET

   Arlen and Tontrup's experiment is designed to test the psychological motivations behind the widely observed disparity between the price we are willing to pay and the price we are willing to accept for the same object. The standard explanation in the H&B literature for this observed disparity is the "endowment effect": we form an emotional attachment to whatever we possess (i.e., whatever we are "endowed with"), which leads us to value it more than we would if we did not possess it. Assuming that the emotional attachment is transitory, H&B scholars have generally concluded that the endowment effect is irrational, because "people's valuation of an entitlement can depend on their relationship to the object in ways that do not affect its actual utility to the person." (14) How can the same mug be worth four dollars to you if you don't own it and eight dollars if you do? (15)

   The experiment focuses on one of the alternative explanations for the willing-to-pay/willing-to-accept disparity advanced in the H&B literature: our reluctance to trade is motivated by our fear of future regret should the choice turn out to be the "wrong" one. (16) (The explanation in this case relies on the plausible assumptions that we code a trade as an act and a failure to trade as an omission, and are more prone to regret actions that turn out...