As I was writing this post, the Greeks are deciding on their future in the Eurozone whether or not they will stay with the Euro. There is a good post that summaries the key aspects on this decision and its potential effects. I really recommend reading it.
Lately I have been reading Richard Thaler’s Misbehaving. It is essentially Thaler’s academic autobiography that combines his personal journey as a researcher in the early days of behavioural economics with insights gained from that field.
Behavioural economics was born as an investigation to the key assumption in the classical study of economics. Traditionally, in order to make economic theory easy to work, economists assumed that every human is rational thinker, called Econ. That is,
- they are able to make decisions consistently and rationally;
- they don’t suffer from lack of willpower, ability to align current actions with long term goals; and
- they always act in self-interest with complete disregard for sense of fairness.
On the issue of fairness, it is best illustrated with a story.
Imagine yourself living in New York State, where you might experience severe a snow storm on a regular basis. There is a local hardware store that usually sell a shovel for $15 . However, after the state experiencing a heavy snow storm, the demand for a shovel rises, so your local storeowner decides to rise the price of a shovel to $20 as predicted by classical economic theory.
Ask yourself, would you buy a shovel if you need it?
If you are an Econ, you will simply accept that the price has to rise to match the demand for shovel. However for majority of people, the act of the storeowner is generally despised. I, like many, feel that it is UNFAIR that I am being punished for something beyond my control. And I might not buy a shover out of spite, but that is not how an Econ would behave.
So how does this affect in a larger context?
As a human, we care quite deeply about the fairness and ethics. I am not arguing that we should behave like an Econ. However, there are interesting consequences and some are quite contradictory.
In my post on queueing outside restaurant, I suggested an idea that dynamic pricing might be a way to address queueing problem. However, as humans, we are horrified by the idea that we might be unfairly treated when the price spikes. It is a similar reaction when people critique Uber on their pricing scheme.
Interestingly, we don’t react in the same way to the price fluctuation of flight tickets. It is easy to forget that prior to the Airline Deregulation Act of 1978, flight tickets used to cost the same irrespective of the day of the week or the time of the day. Now, we are so accustomed to the price fluctuation that we forget what it must have felt like before 1978. Surprisingly, we also get cheaper airline tickets too.
It is worth asking ourselves if our sense of fairness might be a barrier to implementing a useful idea, and as a consequence, we might be suffering from it.