Dan Ariely has an interesting little book out which I am reading: “Predictably Irrational: The Hidden Forces That Shape Our Decisions.” He talks about such things as imprinting, decoys, herding, anchoring, and market behavior. And this is only in the first two chapters. I’m sure there will be much more interesting stuff as I get deeper into the book, but right now I want to address the socialist fallacy he drops in at the end of chapter two.
In chapter two, “The Fallacy of Supply and Demand,” he talks about a variety of experiments and exercises dealing with arbitrary coherence, or anchoring. Arbitrary coherence is our tendency to base our perception of prices on our initial exposure to them. That is, we can remember when we first started buying a cup of coffee at the convenience store for twenty cents, and so now a dollar (or four dollars) seems outrageous. He even gives examples which show that the initial exposure doesn’t have to relate the price to the goods in any rational way – it can be purely random, but yet still be an anchor for our price perceptions. In one experiment, subjects were asked to write the last two digits of their social security number preceded by a dollar sign next to pictures of four items. Then they were asked to place bids on the items. Their bids were found to correlate to their social security numbers. After a number of other examples, he is able to argue with some conviction that the traditional forces of supply and demand are not a reliable guage of market behavior. His summation goes like this:
. . . In the framework of arbitrary coherence, the relationships we see in the marketplace between demand and supply . . . are based not on preferences but on memory. . . .
Another implication of arbitrary coherence has to do with the claimed benefits of the free market and free trade. The basic idea of the free market is . . . that the mutual benefit of trading rests on the assumption that all the players in the market know the value of what they have and the value of the things they are considering getting from the trade.
But if our choices are often affected by random initial anchors, . . . the choices and trades we make are not necessarily going to be an accurate reflection of the real pleasure or utility we derive from those products. . . . If anchors and memories of these anchors – but not preferences – determine our behavior, why would trading be hailed as the key to maximizing personal happiness?
He is under the mistaken impression that his theory of arbitrary coherence displaces completely the older theory of demand and supply. This appears to be just an assumption he makes – the few pages he devotes to this entire subject can’t supply anything like the exhaustive analysis it would take to prove his assumption. And a few seconds thought is enough to show that desire is still very much in operation. His theory might be a useful adjunct, but a replacement? . . . nahh.
His last paragraph reveals his socialist side entirely:
So where does this leave us? If we can’t rely on the market forces of supply and demand to set optimal market prices, and we can’t count on free-market mechanisms to help us maximize our utility, then we may need to look elsewhere. This is especially the case with society’s essentials, such as health care, medicine, water, electricity, education, and other critical resources. If you accept the premise that market forces and free markets will not always regulate the market for the best, then you may find yourself among those who believe that the government (we hope a reasonable and thoughtful government) must play a larger role in regulating some market activities, even if this limits free enterprise. Yes, a free market based on supply, demand, and no friction would be ideal if we were truly rational. Yet when we are not rational but irrational, policies should take this important factor into account.
What a maroon! He takes his unproven assumption as fact and says that that makes the current (mostly) free market incapable and unreliable, and therefore the government must step in and control things because in its wise beneficence it can take all factors into account reasonably. He’s living in a dream world. He believes the government is the source of what is good and right. Why he believes this, why anyone would believe this, is beyond me. Any real assessment of things, however brief, would smash that false hope. If you want things fubar, just let the government run them. Running anything by committee, compromise, and scrabbling for make-work job security is a sure way to total inefficiency. And what would make him think that the forces he talks about in his book aren’t just as much in effect for the government? We all make decisions based on memories and desires (and other factors) and we might not even recognize them. We rationalize our decisions later. What could make him think that the people in government are any different?
I guess his liberalism shouldn’t surprise me. It’s everywhere these days. And it just continues to show these human foibles – operating from desire and rationalizing later. He wants things to be manageable. He wants a better world. He thinks everyone will see things his way. Oh well.
