207. Should We Really Behave Like Economists Say We Do?

[0] All right, let's start with your name.

[1] My name's Greg Rosalski.

[2] And to people who listen to this program, especially if they get all the way to the end, to the credits, your name is a familiar name, yes?

[3] Maybe, I guess.

[4] But, yeah, I'm a producer at Freakonomics Radio.

[5] How you like in your job, by the way?

[6] It's great.

[7] I mean, you know.

[8] Of course, I'm your boss.

[9] You're not really going to say otherwise.

[10] And Greg, you are what might be called, or at least I might call you this, a real fan of economics, yes?

[11] Would you say that's accurate or now?

[12] Yeah, I mean, you know, on a typical Friday night, if it's going well, I'll open up a microeconomics textbook and just, no, more seriously, yeah, I'm a huge fan of economics.

[13] I studied it at grad school.

[14] You read econ papers, kind of not for fun.

[15] I mean, for your job, for For Economics Radio, but you like it.

[16] You blog, right?

[17] A blog called blog is your blog.

[18] Yeah, I write about economics.

[19] And I remember when the two of us were at the American Economics Association annual meetings in Boston, you looked like, you looked like my daughter at a One Direction concert.

[20] I'll be honest with it.

[21] You were into it.

[22] Yeah, I was very into it.

[23] All right.

[24] So in your studies, having studied econ and public policy at the Woodrow Wilson School at Princeton, correct?

[25] Yeah, that's right.

[26] So in your studies of economics, you have surely come across a character that's kind of a model for how economists or economics predicts that humans behave, who's known as homo -economicus.

[27] Yes?

[28] Do you remember reading, learning about him?

[29] Absolutely.

[30] I mean, if you've ever taken an economics class or read an article from a huge cross -section of academic papers, it's sort of hard not to encounter this creature.

[31] I mean, academics might not always refer to them by name, but implicitly, their models usually assume that the people they're modeling are hyperrational and always work to make themselves as best off as possible.

[32] And would you say that what you just described the kind of hyperrational and working to maximize or optimize your choices and your decisions, does that describe you as a human?

[33] No, I don't think so, actually.

[34] Would you like it to?

[35] I think so.

[36] I mean, like most people, I think that, you know, my brain has various biases and heuristics and emotions that sort of cloud optimal decision making.

[37] And I think I would personally be better off if I behave that way.

[38] But I'm not quite sure that society would be better off.

[39] Well, all right.

[40] Why don't we do this then?

[41] Let's give it a try.

[42] Let's undertake a mission, which is to make you.

[43] Greg Rosalski more, you know, better off, as you put it, by becoming more like homo -economics.

[44] Try to live your life a little bit more the way that economists would describe the way someone should live their lives.

[45] Are you up for that kind of mission?

[46] Definitely.

[47] It sounds like an adventure.

[48] Now, you are a very bright guy, I know, but still, it would be nice, don't you think, to have some kind of personal tutor, like a Virgil, to walk you down into the depths, some kind of economics therapist maybe to walk you through these decisions.

[49] You like that idea or no, you want to go on your own?

[50] Yeah, for sure.

[51] I mean, given many academics think that nobody behaves this way, I think it would be really helpful to have some sort of advisor or, yeah, you could call him a therapist.

[52] So does any particular econo therapist come to mind?

[53] Are you thinking of who I'm thinking of?

[54] I think, you know what?

[55] There's a good, hang on, hang on.

[56] On the count of three, we'll see if you're thinking what I'm thinking.

[57] Ready?

[58] One, two, three.

[59] Thaler.

[60] Thaler is Richard Thaler.

[61] I'm a professor of economics and behavioral science at the University of Chicago Booth School of Business.

[62] But he's more than that.

[63] Thaler, 69 years old, is one of the founders of the field that has come to be known as behavioral economics, which, to be very, short -handy about it, runs homo -economics through a few layers of psychological understanding to see how real people actually behave.

[64] Thaler has been doing this work for many years, but his public breakthrough came a few years ago when he co -authored a book with the legal scholar Kass Sunstein.

[65] We ended up calling our book and the tools we use nudges.

[66] In Thaler's view, if you want to get people to do more of what they should be doing, save more money for retirement or eat more nutritious food or break some bad habit, sometimes you have to nudge them into doing so.

[67] Because most of us don't necessarily respond to incentives as rationally as economic theory would predict.

[68] Because most of us, from the economist's perspective, misbehave.

[69] Which is the theme of Richard Thaler's new book?

[70] So the book is called Misbehaving, the Making of Behavioral Economics.

[71] Misbehaving is Thaler's very entertaining chronicle of how he came to recognize that the standard economist's model of human behavior is beyond the reach of most of us.

[72] Well, the economic model of behavior really can be summarized by one word, which is optimizing.

[73] And at the center of this model is the creature that our producer, Greg Rosalski, hopes to become.

[74] This mythical creature is called homo -economicus, and I call them e -cons for short.

[75] And, you know, none of us know any e -cons.

[76] An econ can make any calculation perfectly accurately, as no self -control problems, makes accurate forecast.

[77] He's not overconfident.

[78] Has no emotions.

[79] So, can we take Greg?

[80] a perfectly nice and intelligent 30 -year -old man, and under the tutelage of Richard Thaler, turn him into an e -com?

[81] And even if we can, would that be a good idea?

[82] That would mean sending him out into the world, interacting with all sorts of people.

[83] And let me warn you, it isn't always going to be pretty.

[84] I'm tired.

[85] It came from work.

[86] Go away.

[87] Nah, don't wish your time, man. Whoa, whoa, whoa.

[88] Okay, yeah.

[89] Some random jerk.

[90] Yeah, that will trigger my, like, free.

[91] free loader trigger.

[92] 50 cents?

[93] No, that's not worth it.

[94] I promise to never act like this again.

[95] From WNYC, this is Freakonomics Radio, the podcast that explores the hidden side of everything.

[96] Here's your host, Stephen Dupner.

[97] Today, I'm turning the mic over to Greg Rosalski, a producer here at Freakonomics Radio, who is teaming up with the economist Richard Thaler to try living as homo -economics, a supremely rational being.

[98] As a long -time practitioner of behavioral economics, Thaler has the kind of experience that could make him a good advisor.

[99] In my quest to become homo -economics, the model of human behavior, still taught in Economics 101, there may be no better advisor than Richard Thaler.

[100] He's actually been described by a colleague as the world's only clinical economist.

[101] That's sort of like being a therapist, except he uses principles from economics to improve people's lives.

[102] He's done this casually for his friends over the years, and it's sort of what he's evolved.

[103] to do professionally?

[104] You know, you can think of Nudge as the culmination of my career as a clinical economist because what Kass and I try to do in that book is help people think about organizing their lives in a more successful way and helping governments and the private sector create institutions that allow people to achieve their goals more helpfully.

[105] Nudge had a huge influence in public policy circles.

[106] Kass Sunstein ended up directing regulatory policy for President Obama, while Thaler advised a bunch of governments, including Britain, which set up an office nickname the Nudge Unit.

[107] That office nudged citizens to do things like quit smoking, find jobs, pay their taxes on time, and conserve energy.

[108] And the Nudge unit reportedly did all of this while saving British taxpayers tens of millions of pounds.

[109] So who better than Thaler to teach me how to become Homo Economicus?

[110] Well, I'm not sure that I will teach you to become homo -economics, but, you know, go for it.

[111] Tell me what your problems are, and I'll put you on my couch.

[112] I hope you're lying down.

[113] I'm in a seat.

[114] It's very comfortable seat.

[115] Okay, that's good.

[116] Okay, so Professor Thaler, I have a little problem.

[117] Every morning, I commute from Brooklyn to Manhattan on the subway, and it's always so crowded that I can't get a seat.

[118] This means that I can't sit down.

[119] I can't enjoy my morning coffee, and I can't read the morning news.

[120] And so it's a pain in the butt.

[121] And so thinking like an economist, I devise a little experiment.

[122] How much would I have to pay you for that seat?

[123] Sorry?

[124] How much would it cost for you to move from your seat?

[125] How much would somebody have to pay you?

[126] To move from my seat?

[127] Excuse me, can I ask you a question?

[128] How much would they have to pay me what?

[129] $80.

[130] $80?

[131] That seems pretty steep.

[132] The people on the subway have a temporary property right to their seats because they got there first.

[133] So in my effort to become homo -economics, it seemed like the best thing to do was just pay them for their seats.

[134] I wanted to do this for as little money as possible.

[135] But sometimes, people ask for things I just couldn't give them.

[136] I don't know.

[137] To not feel like shit right now.

[138] I'm like not have to go to work.

[139] That's how much.

[140] I was hoping a quarter or two would do it.

[141] Well, I think you're behaving like a very good economist.

[142] But my guess is that you get very few takers.

[143] I don't think I would get up for you.

[144] So you wouldn't, but there would be a price, though, right?

[145] If you had $100 or you're going to give me, yeah, I'd probably do it.

[146] So if I had just, I had $10, I was like, here.

[147] A long day, have a comfortable seat.

[148] And probably a lot of dirty looks and possibly worse.

[149] Well, I definitely get up for someone who needs to sit down, like an older person or a pregnant person, but if it's just like some random jerk, then I'm going to be like, I'm going to keep my seat.

[150] Thank you.

[151] One thing I learned about trying to buy seats from people is that there are a couple social norms when it comes to subway seats.

[152] The first one was that people thought I was a weirdo because seats are not thought of as for sale.

[153] Because you were acting like an economist.

[154] How much would I have to pay you?

[155] I don't know.

[156] It's a weird question.

[157] And the second social norm I encountered, which was actually one in which people said they were willing to move from their seat if I were elderly injured or pregnant.

[158] It depends on who the somebody was.

[159] What about me?

[160] Limitless.

[161] There is no price.

[162] How about you?

[163] How much would it cost for you to move from your seat?

[164] How much are you willing to pay?

[165] let's say like Hey let's not say Let's just say What are you going to pay me to get at my own?

[166] How about like 50 cents?

[167] 50 cents?

[168] No, that's not worth it.

[169] If you were a kind old lady I would just get up for free.

[170] And so that brings up the question How does homo -economics deal with social norms?

[171] Well, Homo -economics doesn't much pay attention to social norms unless it's going to hurt them financially.

[172] So I can see homo -economicus running that experiment and not having a lot of success.

[173] And, you know, a real homo -economics would bring a cane with them when they commute.

[174] Try that, you know, maybe even a fake cast.

[175] Okay, okay.

[176] This is really smart.

[177] I think that'll do it for you.

[178] Nice.

[179] So, yeah, we can, I'm going to start charging, though, for this advice.

[180] Yeah, you're a terrific clinical economist, I must say.

[181] Thank you.

[182] Thank you.

[183] And so would Homo Economicus give up his or her seat to a stranger on the subway?

[184] They would if the money they were offered was greater than the utility of sitting.

[185] You can't buy my seat.

[186] I'm tired.

[187] It came from work.

[188] Go away.

[189] I'm going to ask other people.

[190] How about you, ma 'am, how much would I have to pay you for your seat?

[191] If you want it really badly, you can have it for nothing.

[192] If I were really homo -economics, I would have taken advantage of that kind old lady.

[193] That doesn't sound very nice, does it?

[194] Which brings up the question, why in the world would I ever want to be homo -economics?

[195] Well, there are a few things that are really appealing.

[196] First off, e -cons, as Professor Thaler calls them, always do something called constrained optimization, which is a fancy math term that just means they are really, really good and making themselves as happy as possible.

[197] So that means econs always save, invest, and consume in a way they won't regret.

[198] They do exactly the right thing all the time.

[199] So no econ has ever had a hangover.

[200] Sounds nice.

[201] Econes don't have self -control problems.

[202] They always have the willpower to commit to their goals.

[203] If he says he's going to go on a diet next week, he goes on a diet next week.

[204] And they always follow the bedrock principles of economics, like ignoring sunk costs.

[205] For example, let's say you go out to dinner at a fancy restaurant that has a prefix menu.

[206] So no matter what, you're going to get an appetizer, main course, and dessert all for one price.

[207] After downing the main course, you're really full.

[208] But then the dessert comes, and you tell yourself, I just have to eat that piece of cake because I don't want to waste money.

[209] If you do that, then you're human, but you're misbehaving.

[210] economic theory says the only thing that matters is how much it costs you to eat that cake, which is zero, not how much you paid for it.

[211] That's the sunk cost.

[212] So, econs don't fall for the sunk cost fallacy, which is doing something that will make you less happy only because you're worried about losing money.

[213] Even though that money is gone forever, it's sunk.

[214] You can't get it back.

[215] So it shouldn't affect your decisions going forward.

[216] I don't know about you, but I fall for this kind of thing all of the time.

[217] These are just a few examples of why being an econ sounds pretty appealing when it comes to how we should behave.

[218] But as Thaler says, it's not how we actually behave.

[219] It's basically a creature that is unrecognizable.

[220] I've never met one.

[221] That's even though this model of behavior still taught to students around the world has dominated the discipline for Thaler's entire career.

[222] So I started early in my classroom.

[223] career noticing ways in which people behaved that were different from the way they were supposed to behave, that they were misbehaving, thus the title of my book.

[224] It started just with making a list of funny things people do, and that list has grown and has now, some 40 years later, turned into a field.

[225] This field, behavioral economics, sparked a huge debate, and it's one that matters for all of us.

[226] When you sign up for a new job, should your company give you a gazillion options for your retirement plan, or should it make it easy by giving you a default option?

[227] If you believe we're all econs, we should get as many choices as possible, and the default shouldn't matter.

[228] But if you believe we're feeble humans, that we could be overwhelmed by choices, be lazy, and ignore fine print, then a good default option would be best.

[229] The default is one of many examples of Thaler's nudges.

[230] A nudge is an intervention that changes your behavior, but one which you are free to ignore if you want.

[231] So you can think of an example of this is handing somebody an alarm clock.

[232] If they have trouble getting up in the morning, an alarm clock is a very useful tool.

[233] But you can hit the snooze button or turn it off.

[234] Thaler says that companies and government should make more use of policies that function like alarm clocks.

[235] And he and his colleagues have worked to do just that.

[236] They've also inspired the invention of new technologies.

[237] Here's an exercise idea proposed on a previous Freakonomics radio episode.

[238] by Professor Catherine Milkman of the University of Pennsylvania.

[239] So imagine that you took a company like Netflix and you called it Jim Flix and you let people set aside certain TV shows for gym -only access.

[240] My research suggests that a product like that might be very attractive to people.

[241] If we were all econs, something like Jim Flix wouldn't motivate us to work out more.

[242] But Milkman has evidence that it does.

[243] Yet the debate continues.

[244] One of the most contentious ones is about financial markets.

[245] Models that assume that we all behave as rationally's econs say there won't be problems like stock market or housing bubbles.

[246] Thaler calls this prediction the price is right, like the game show.

[247] Those who believe the price is right, and always right, reject evidence from the lab.

[248] They argue that in the real world, competitive markets force investors to be rational.

[249] After all, they say, investors will lose tons of money if they aren't.

[250] Behavioral economists like Thaler disagree.

[251] They argue that prices, such as the valuations of companies, are often wrong, sometimes very wrong.

[252] They believe bubbles exist because we make systematic mistakes, that we misbehave.

[253] This view has gained popularity in recent years, but there are still strong defenders of the traditional model, which is sometimes known as rational choice.

[254] So the devil's advocate, and this is probably a lot of your colleagues at the University of Chicago, probably less than there were when you were first starting off, but they say, okay, sure, human beings don't behave exactly as the rational choice model predicts, but But within competitive markets where there are high stakes and simple rules to follow, these models have been tremendously powerful when making predictions, at least on average.

[255] And so what do you say to those types of arguments?

[256] Well, I would say two things.

[257] One, in the book, I coin a possibly obnoxious phrase called the invisible handwave.

[258] And you were basically using the invisible handwave in the question.

[259] you ask me. So, you know, the idea that somehow people will misbehave in the lab, but then when they get out in the real world, they behave just like an econ, you know, did people live through the last eight years when we had a housing bubble and people were giving mortgages to people who can't afford them and people were taking out those mortgages and then getting in trouble when house prices fell.

[260] The notion that somehow markets are going to force people to be rational is just silly.

[261] But Thaler doesn't think it's silly for us to aim at becoming e -cons.

[262] You know, it would be great if we all had a spreadsheet that was running constantly in our brain and making calculations.

[263] And I think we would be better off having expectations that lined up with reality.

[264] I think we would be better off if we didn't have a third of the population that was obese.

[265] So I think most of the time it would be better if we were all econs.

[266] Thaler has a big exception to this, which you'll hear in a bit.

[267] But one area he thinks we'd be better off acting like this creature is when we make decisions under uncertainty, like how we should make investments or pick a job.

[268] In the real world, we don't always do this right.

[269] We do quirky things, like valuing what we hold more, when it's taken away from us than when it's given to us and miscalculating the odds of events or the value of investments because of how many times we hear about them on the news.

[270] Thaler says we'd be better off following the rational model of making decisions when there's uncertainty.

[271] It's called expected utility theory.

[272] Well, the theory is really quite simple, at least in principle.

[273] If you are considering some risky option, look at the probabilities, compute the utilities and calculate and pick the best thing.

[274] So, Professor Thaler, relationships are big investments.

[275] Yeah.

[276] Yeah.

[277] And I've been dating this girl for a few weeks now.

[278] And I'm thinking about using expected utility theory in order to decide whether or not to ask her to be my girlfriend.

[279] How would an econ go about making this decision?

[280] Well, now, the first thing you would have to do is e -cons always think.

[281] about opportunity costs.

[282] So you have to compare this girlfriend to all the possible other girlfriends.

[283] Now, you do have training in economics, right?

[284] Yeah, I do.

[285] So that may be a limited set because, right, this has to be a girlfriend that presumably wants to reciprocate this relationship.

[286] So there's a set of possible girlfriends, not all of whom you know.

[287] Economists have written down models about how you should search in a situation like this.

[288] So, you know, you've had other girlfriends in the past and either you or they have rejected you.

[289] So the question of whether this is the right one depends on how likely it is you'd find somebody better.

[290] That's the first thing an economist would do.

[291] Right.

[292] And there's also other probabilities, right?

[293] I mean, you know, someday I want to get married.

[294] Someday I want to have kids.

[295] And, you know, so that sort of that upfront investment in her being my girlfriend, you know, I kind of have to have some sort of knowledge of the probabilities that, you know, I'm making the right investment here.

[296] Right.

[297] And presumably if you decide that this is your girlfriend and behave responsibly, then you're going to be missing out on all kinds of opportunities for.

[298] searching for better alternatives, and that will be another opportunity cost that Homo Economicus will be considering every day.

[299] Each day will be another decision about whether to stick with this girlfriend or resume searching.

[300] I recommend strongly not playing this particular part of the interview to this prospective girlfriend.

[301] Yeah, I might, yeah, I might have to do some for this.

[302] Related question, actually.

[303] Can Homo Economicus be romantic?

[304] I don't really think so.

[305] No, I don't.

[306] I don't think so.

[307] But to be serious for a second, this girl is really great.

[308] But to use it, she's really terrific, and I have a big crush on her.

[309] But again, trying to live my life as Homo Economicus.

[310] So here's my plan.

[311] I'm going to create a spreadsheet and figure, out the costs, benefits, and probabilities of this decision with her, and then take the plunge.

[312] Does that sound like a good idea?

[313] Well, it would sound like a good idea if you wanted to make a decision as Homo Economicus.

[314] You better include how much money she's going to make.

[315] This doesn't sound very romantic, does it?

[316] But I really like this girl.

[317] So thinking like Homo Economicus, I thought about how I can maximize the difference.

[318] chances that she'd become my girlfriend.

[319] That is, of course, in the case that my spreadsheet ended up saying she was an optimal choice.

[320] The date I picked was Valentine's Day, the place, the most romantic spot in New York City I could think of.

[321] How about the top of the Empire State Building?

[322] Oh, yes, that's perfect.

[323] It's the nearest thing to heaven we have in New York.

[324] The Empire State Building Observatories are New York City's highest and feature unobstructed 360 degree view.

[325] It's just crazy.

[326] There's nothing more romantic than walking.

[327] You can walk up this whole way here.

[328] There's nothing more romantic than walking upstairs.

[329] With a crowd of people.

[330] With a crowd of people.

[331] The movie they just pop right on up.

[332] There's no lines.

[333] There's no ticket.

[334] They just go up and they meet each other there.

[335] We made it.

[336] We're at the observation deck now.

[337] We're inside.

[338] It is snowing outside right now.

[339] All right.

[340] Let's bundle up before we go out there.

[341] It's snowing pretty hard.

[342] We can barely see past about 20 blocks or so.

[343] So what can you see right now?

[344] Let's see.

[345] Oh, I see the Chrysler building.

[346] Well, I guess this is a good moment.

[347] So, hey, Rachel.

[348] Hey, Greg.

[349] Well, I asked you to come up here on Valentine's Day because I have a question to ask.

[350] All right.

[351] But before I ask it, hold on one second.

[352] Is this an iPad for me?

[353] No, actually.

[354] I just have to fill out this spreadsheet real quickly.

[355] All right, here we go.

[356] So before I ask the big question, I have a few smaller questions to ask, okay?

[357] As you know, I've been living my life as Homo Economicus, and before you'd make a decision like this, you would weigh out all the cost, benefits, and probabilities.

[358] If you think about it, this is really an investment, and I just want to make sure we're making the right decision here.

[359] So, okay, here we go.

[360] what is the probability that you'll want to get married within the next five years um do i say like on a spectrum um medium to high okay great that's good that's good okay here's another question what's the probability that you want to have children within the next 10 years the next 10 years yeah um hi okay great uh that That's awesome.

[361] So, all right, so just a few more little things.

[362] Also, there's costs and benefits involved in this decision.

[363] So, I mean, we live about half an hour away from each other on the train, which is, that's kind of a pain in the butt, right?

[364] I mean.

[365] Yeah, it's true.

[366] Okay.

[367] And also you're a vegan, so that kind of, whoa, whoa, whoa, okay, yeah.

[368] So that kind of, you know, limits are.

[369] Happy Valentine's Day.

[370] Happy Valentine's Day.

[371] Okay.

[372] Well, so, yeah, so, so that limits are really.

[373] So, so, so that limits are restaurant options a little bit, you being a vegan.

[374] That could be a benefit to your health.

[375] Okay, that's true.

[376] But it does limited options, but you know what, you're right.

[377] Maybe I'll switch to being a vegan too.

[378] And then, I mean, there's the opportunity cost of us being single, but you know what?

[379] I mean, that's overrated.

[380] But on the other hand, there's just tremendous benefits as I see it.

[381] I mean, you're just so smart and you're beautiful and you're funny, and I have such a great time with you.

[382] And I've thought about it.

[383] I've We've weighed everything, and I'm wondering if you'd want to be my girlfriend.

[384] Yes.

[385] I mean, as long as she promised to never act like this again.

[386] Yeah, I can agree to that.

[387] All right.

[388] So, Greg, it's been a few months since you and Rachel officially became a couple up on the Empire State Building.

[389] How are things going on that front?

[390] Are you still together?

[391] Well, believe it or not, Stephen, I'm happy to report, yes.

[392] We're still together.

[393] And do you think that's because of, or despite, The romantic spreadsheet you whipped out that night.

[394] You know, I'm really happy with the relationship.

[395] So I guess you could say I made the optimal decision.

[396] But I can't really say if that's because of the cost -benefit analysis I did with my spreadsheet.

[397] Okay.

[398] But maybe.

[399] So I'm curious.

[400] Have you found that having a girlfriend now has affected your pursuit to be more like Homo Economicus?

[401] I guess I'm thinking about this in at least two directions.

[402] you know, one, you might see yourself now as half of a couple with a different future trajectory than if you were purely single.

[403] And then, two, there's the opportunity cost angle.

[404] You aren't having to spend a lot of time pursuing a girlfriend.

[405] So how is that working out generally?

[406] Well, Stephen, to put it in economic terms, I think there are a lot of complementarities between me and Rachel.

[407] We like hanging out.

[408] We like doing things together.

[409] And I think we're happier together than we would be a part.

[410] So I think, and I think that's even truer since Valentine's Day.

[411] Okay, Greg, I want you to tell us what we are going to hear from you in Act 2 as you continue to live your life a bit more like Homo Economicus.

[412] If you haven't already guessed, Stephen, this creature doesn't quite fit in the world that we live in.

[413] And a big part of that comes from what Thaler said at the top.

[414] An econ has no emotions.

[415] As you'll hear from Thaler, this.

[416] This has some big downsides for society.

[417] Humans are a lot nicer than econs.

[418] But as a different economist tells me, there might be a real upside to going through life thinking like an econ without all that emotion.

[419] He doesn't have hate.

[420] He doesn't have envy.

[421] So think about terrorism.

[422] In a world where everyone is homo -economics, who would the terrorists be?

[423] From WNYC, this is Freakonomics Radio.

[424] Here's your host, Stephen Dubner.

[425] Greg Rizalski, a producer on this show, is trying to be.

[426] live his life more like homo -economics, the economist's idealized version of the human being.

[427] So far, he has gotten advice on how he could improve his morning commute, and he's had some success on the finding a girlfriend front, although we don't really know the counterfactual, whether he might have been just as successful, even more so, without the spreadsheet.

[428] Now it is time to think about how a guy like him, a would -be econ, fits more broadly into society and what he can and should be contributing to society.

[429] He starts small with a musician playing in a subway station in Greenwich Village.

[430] Excuse me. Yes.

[431] Hi.

[432] Can I ask you a question?

[433] How many people walk by and enjoy you playing the viola and do not give you money?

[434] How many people give me money?

[435] It's definitely a small percentage of the people who walk by.

[436] There are probably thousands of people who walk by even in like an hour.

[437] and yet I also have made my living at it for months this way.

[438] Let's say I'm completely cynical or I'm a sociopath, and I just sit here and I listen to you play this beautiful music, and I don't pay.

[439] What do you think then?

[440] I admit, I get kind of annoyed if someone sits directly in front of me, listens to multiple movements.

[441] I, like, give my, like, a special best because they're there, and then they don't pay anything.

[442] Yeah, that will trigger my, like, free -freloader, Trigger, yeah, yeah, I don't like that.

[443] And so when people do give you, because this is, in economics, this is what is known as a public good, where I can get access to it without paying for it.

[444] So there's an incentive problem there, and so when people do give you money for something they don't have to pay for, why do you think they do it?

[445] Well, I like to think it's out of love.

[446] But there probably are a lot of different reasons, including, like, pity and compassion.

[447] or, yeah, guilt, I don't know.

[448] I think there are a lot of reasons why people give.

[449] But I like to think the main reason is, like, inspiration, yeah.

[450] And what's your name?

[451] Allison.

[452] Allison, thank you so much.

[453] Our world is filled with public goods.

[454] Clean air, roads, the rule of law, fireworks.

[455] The list goes on and on.

[456] Public goods have a specific definition in economics.

[457] The most important part is that they are non -excludable.

[458] That is, public goods are really hard to exclude others from consuming.

[459] So in the case of Allison's music, which was played in a public space, there was no real way to prevent me from listening to it.

[460] That's nice because it means I can enjoy her music for free.

[461] But there's a problem.

[462] If everyone thought that way, street musicians wouldn't get any money, and a lot of them might decide to stop.

[463] This is known as the free rider problem, and it's why economists believe free markets cannot always provide public goods.

[464] I asked Professor Thaler about this.

[465] So standard economic theory predicts that public goods will not be provided at the optimal level because of what's called the free rider problem.

[466] Basically, many people will not contribute to something they can get for free.

[467] So is it safe to say that Homo Economicus is a free rider?

[468] Yes, and proud of it.

[469] Econs think that it's a fool's game to contribute to charity or donate to public radio.

[470] Boo.

[471] Right, because why should I donate?

[472] because I can listen for free.

[473] The decision to give money to a street musician is similar to many other decisions.

[474] Should you clean up the common space of your shared apartment?

[475] Should you support the accuracy of Yelp by uploading reviews yourself?

[476] Should you give money to that charity that helps starving children?

[477] And when it comes to our government, should you contribute to the public good that is a well -functioning democracy by, say, voting?

[478] We are in WMYC on election Day, November 4th, 2014.

[479] You're going to vote today?

[480] That's our executive producer, Susie Lechtenberg.

[481] I'm not quite sure, because I'm thinking about what Homo Economicus would do, and I don't think he would vote.

[482] To be sure, I called up the economist Brian Kaplan, a professor at George Mason University, an author of The Myth of the Rational Voter.

[483] Hello, Professor Kaplan?

[484] Hello.

[485] I explained to Professor Kaplan that I was attempting to live my life as Homo Economicus.

[486] The classic version of this creature is completely selfish.

[487] So I asked Kepler, if I were really the selfish homo -economicus, would I vote or not?

[488] If you're totally selfish, the odds that your vote is going to change the acumen election is so slim that you simply would not bother to vote.

[489] Even if you're voting on your own execution, you're more likely to die on the way to the polls than you are to get executed.

[490] So you might as well just take your chances and sit it out and stay home.

[491] But maybe there are some reasons why the super selfish homo -economics would want to vote.

[492] like, say, signaling to his friends and his colleagues.

[493] So say I want to get that nice, I voted sticker and put it on my shirt and then show home my friends and say, hey, look at me. Yeah, as long as they didn't realize what was going on.

[494] So, yeah, if you're all homo -economics, then there'd be very little point.

[495] But if you were trying to pass.

[496] So I'm a homo -economics, but all my friends will get very upset at me if I don't vote.

[497] So what do I do?

[498] Well, I could either take two hours out of my life and vote, or I could go online and print out some stickers, which will take care of my voting requirements for the next 20 years.

[499] Every time there's election, I pull a sticker off the sheet, and my friends are on the wiser.

[500] It was already election day, and I didn't have access to counterfeit I voted stickers.

[501] So that wasn't really an option for me and character as Homo Economicus.

[502] Furthermore, I had a bunch of non -homo economicist friends and colleagues who did vote and urged me to do so too.

[503] One of them was my friend Sean, who works at a desk near mine.

[504] He immigrated to this country, and he actually put in the work to become a naturalized citizen.

[505] He cares about our democracy.

[506] My name's Sean Ramosfer.

[507] I'm the host of a podcast called Side Show from Studio 360.

[508] I explained my situation to Sean.

[509] I saw that you have a little sticker on your sweatshirt and I'm wondering why did you vote?

[510] I voted because I consider it a privilege to vote.

[511] That's, why so?

[512] I mean, you're from Canada so I mean, are you guys not allowed to vote up there or why is it a privilege?

[513] Well, Canadians are allowed to vote.

[514] I moved to the United States when I was 16 years old, and by the time I turned 18 and would have been a legal voter in Canada, I was no longer vested in Canadian politics.

[515] And I became a naturalized citizen of the United States in 2011 at the age of 26.

[516] And that was the first time I could really vote.

[517] That was the first time I voted.

[518] It's always been a passion of mine.

[519] Politics, I find, politics to be a little disheartening at times.

[520] It's a nice word.

[521] But to be so apathetic that I wouldn't vote seems like not to be the correct course of action.

[522] I don't think it'd be helping the situation.

[523] So what's your advice for me?

[524] Can we get personal?

[525] Yeah, let's get personal.

[526] Okay, Greg, I know where you live.

[527] And you live in Williamsburg, perhaps one of the hippest neighborhoods in Brooklyn.

[528] This morning, I went to our...

[529] local polling station in Williamsburg, and there were three people in there.

[530] It was really sad.

[531] We have become cliches.

[532] We're just non -voting, apathetic hipsters.

[533] Counter that narrative, Greg.

[534] Get out there and vote.

[535] For the record, I'm not a hipster.

[536] But maybe Sean had a point.

[537] If I was really homo -economics, maybe this peer pressure wouldn't affect me much.

[538] But Sean's words were enough to at least motivate me to go to my local polling station.

[539] After all, it was only one block from my apartment.

[540] So I'm now in Williamsburg, Brooklyn, outside of a polling station, trying to find a rational reason for me to go in there and vote as homo -economics.

[541] Hey, how's it going?

[542] Can I talk to you guys for a second?

[543] Did you guys vote today?

[544] Why didn't you vote?

[545] House vote doesn't count anyway, so I believe it.

[546] I don't vote.

[547] So economists agree with you.

[548] What's in it for me?

[549] What's in voting for me?

[550] You get a sticker.

[551] That's it, I guess.

[552] Right?

[553] And then you can show it off.

[554] Yeah.

[555] So if you're really selfish, like me. You can show up all your friends on Facebook.

[556] Instagram.

[557] Yeah, a lot of likes.

[558] I'm not sure how much Facebook or Instagram likes are worth, but it's hard for me to believe democracy runs on them.

[559] Which brings up the question, how do economists who subscribe to this view of human behavior think democracy works?

[560] Kaplan again.

[561] It's a good question.

[562] So in a way, you would have to.

[563] ask them.

[564] But, I mean, there is a standard answer, which is, well, once enough people drop out, the probability that you change the outcome will finally get to be appreciable, and then people will finally vote.

[565] So the prediction in the world of Homo Economicus is not that nobody would vote, but that voter turnout would get to be so low that it actually started to pay.

[566] So basically, in most circumstances, the neoclassical economic model says we shouldn't vote.

[567] Of course, not everyone feels that way.

[568] Is an American, you have a duty to vote.

[569] That's not enough to sway Homo Economicus.

[570] Why did I vote?

[571] Because each vote counts.

[572] As a citizen, it's our responsibility.

[573] You know, our community needs a lot of things like, you know, better school, better teachers.

[574] I don't have kids, and I'm not sure I would raise him here.

[575] So if I were really selfish, I wouldn't care about the quality of my community schools.

[576] And even if I weren't in character as homo -economics, my one vote wouldn't matter anyway.

[577] It's not just a simple matter of vote and walk away, but we have to.

[578] vote, they win, we make sure we hold them to it.

[579] So one of the ways in which we do that is to join our civic association, block associations, get together in groups.

[580] So there's power in organizing.

[581] It's power in organizing this thing.

[582] And that's the only way we can get them to adhere to what they say, to do what they say they are going to do.

[583] So we know that homo -economics wouldn't vote in most circumstances.

[584] What about organize?

[585] Well, the leader role is kind of nice because you might be able to get a lot of attention for yourself and turn it into a successful career.

[586] The real question is, would homo -economics ever want to be a rank -and -file follower?

[587] And that's a definite now.

[588] In 1965, economist Mancer Olson published an influential book called The Logic of Collective Action, which applied the homo -economics model to the political world.

[589] He argues that political action is a public good, like the street music we heard before.

[590] That's because people who don't contribute to organize political causes can't be excluded from their benefits, just like we can't be prevented from listening to music in a public space.

[591] Hence, there's a huge free rider problem for collective action.

[592] Now, back to Homo Economicus.

[593] He's extremely selfish.

[594] He has no emotions.

[595] He does a cost -benefit analysis of everything.

[596] He's a type of creature who, as Richard Thaler says, if he encountered one of those give a penny, take a penny trays at a convenience store?

[597] They would take all the pennies.

[598] If collective action is a public good, what does that mean?

[599] The answer is, if everyone were homo -economics, then collective action would never happen.

[600] You might be thinking, we live in a democracy.

[601] Large groups of people work together for the greater good all the time.

[602] The late Mancer Olson would disagree.

[603] Here he is explaining his theory to the U .S. Congress in 1995.

[604] Let's think first of a lobbying organization that we might think of setting up, just to serve the public interest, or to serve the interest of consumers, or taxpayers, or the poor, or any other large class.

[605] Well, if we had such a lobbying organization, the benefits of it would go to a huge number of people, whether or not they pay dues.

[606] And because people cannot be excluded from the benefits, even if they don't chip in, these incentives create a destructive free rider problem.

[607] So that means that we lack organizations that lobby for the public interest in general, such as we have, are tiny and relatively unimportant.

[608] But Olson argued that smaller groups, like big corporations and unions, could lobby effectively.

[609] The free rider problem is less serious for them because one or two or three organizations get a large part of the benefit.

[610] As a result, Olson believed he had the answer to why, in a democracy, special interest groups trump the public interest again and again.

[611] But what about those political causes that did actually benefit large groups of people?

[612] These stories fill history books, movements that ended slavery and apartheid.

[613] fought communism and fascism, preserve freedom, and won independence.

[614] How do people who believe we all act like homo -economicus explain these big changes?

[615] Kaplan again.

[616] Yeah, that's a great question.

[617] So my late colleague Gordon Tulloch had a paper called The Paradox Revolution.

[618] He was as firm a believer in homo -economics as anyone I've ever met.

[619] And he really had two stories.

[620] So story number one is that almost all the history you've heard is wrong.

[621] And really what are painted by historians as mass movements are made.

[622] Strangely struggles between rival elites who then write the history books to claim the people were on their side.

[623] And the Tulloch's other story is there's also the entertainment element.

[624] So Tulloch was around during the student revolt to the 60s and he saw them with his own eyes and he said, look, these kids, they know it's very unlikely that they're actually going to get shot.

[625] There's not going to be a lot of violence.

[626] So what are they doing?

[627] They're having a little party.

[628] You know, we're a big party.

[629] They're going and they're dancing around and they're cheering and they're smoking some pot.

[630] And if the police actually start doing what happens in scarier kind of, They will run away like frightened rabbits or would have.

[631] Pollock's theory shows how, if you believe we're all completely selfish, it's possible to concoct explanations for the big changes we've seen in history.

[632] But there's a problem with that theory.

[633] There's a mountain of evidence that says we're not completely selfish.

[634] How could so many economists lose sight of that?

[635] Richard Thaler again.

[636] How Mr. Econ came to dominate the profession, it was not always that way.

[637] I mean, Adam Smith was a behavioral economist, and economists up until World War II had no trouble realizing that they were trying to talk about real people.

[638] Charity, volunteering, public service, street music, real people contribute to things all the time for nothing having to do with financial or social gain.

[639] That's what a huge volume of research tells us.

[640] What we know is, thankfully, some people do contribute.

[641] So the real world is a mixture.

[642] There are free riders and there are cooperators.

[643] If the extreme version of the homo -economics model were the truth, we would all be free riders.

[644] Everything that requires an ounce of compassion or pity or love would shrivel up and die.

[645] We would all follow the logic.

[646] Why should I give to something when I can get it for free?

[647] The great economist and philosopher Amartya Sen wrote an article describing people who think like that as rational fools because they know the theory, but they're fools because they should realize that if everyone in society behaved that way, the world would not be a very happy place.

[648] So there are huge downsides to living on planet Homo Economicus.

[649] But Kaplan points to the potential upsides.

[650] People often focus on the good emotions that Homo Economicus doesn't have, so he doesn't have love and compassion.

[651] and that kind of thing.

[652] But, you know, they tend to forget the other things he doesn't have, he doesn't have hate, he doesn't have envy.

[653] So think about terrorism.

[654] In a world where everyone was homo -economicus, who would the terrorists be?

[655] Who are going to people are going to say, I'm going to go kill myself?

[656] What?

[657] I'm going to kill myself?

[658] How am I going to enjoy the world that our terrorism is going to create for us if I'm dead?

[659] I'm not doing it.

[660] I just think about what war would be like if every guy on every side is like, all right, well, I'm only going to do this.

[661] It's a very tiny risk.

[662] You know, so homo -economics could end terrorism, give us world peace.

[663] For better or for worse, we don't live in a world of homo -economics.

[664] We live in a world of homo sapiens, where some people contribute to public goods, some do public bads, and some people do nothing.

[665] Some are free riders and others, cooperators.

[666] And neither extreme model is a good description of the way people actually behave.

[667] Professor Richard Thaler has spent his career urging his fellow economists to recognize just that, how people actually behave.

[668] And if economics is supposed to be a science, not a dogma, its models must take that into account.

[669] The neoclassical model that we poked fun of on this program is still taught in economics 101.

[670] But rational choice models have undergone major revisions in recent decades.

[671] Behavioral economists have played a big part in that.

[672] For example, in what could be called homo -economics, 2 .0, many economists have dropped the classic assumption that everyone is completely selfish.

[673] Yeah, and I think most economists would agree that the second one is close.

[674] closer to the truth.

[675] But I think it depends on where you want to draw the line.

[676] So I think no economist would deny that people behave altruistically toward their family members and close friends.

[677] And you can make an argument about reciprocity that this is all rational.

[678] But it's clear that people show more other regarding behavior.

[679] then even that expansive definition would suggest.

[680] And the phrase that I like to use for this is people are conditional cooperators.

[681] So you don't want to be the only one that put some money into the guitar case for the street musician.

[682] But if other people are, then they will too.

[683] And that's why any smart street musician starts by putting some money in the case before they start playing.

[684] And just as some people are conditional cooperators when they give money to a street musician, conditional cooperation can explain why many people volunteer for causes for the greater good, or depending on your perspective in place, the greater bad.

[685] As for Homo Economicus 2 .0, according to Kaplan, this non -selfish version can explain why we would rationally vote in some cases.

[686] Right, right.

[687] So Homo Economicus 2 .0 might vote if the stars align.

[688] So what do you need to have the stars align?

[689] Well, you need the candidates to actually be really different from each other.

[690] Homo Economicus has to figure out which one is actually better.

[691] A whole lot of people have to be affected, and the election has to be close.

[692] Put that all together, and Homo Economicus probably would vote.

[693] So Homo Economicus 2 .0 is an improvement, bringing us closer to explaining how the real world works.

[694] And that's important because economic models help us think through problems and come up with solutions.

[695] But even Homo Economicus 2 .0 is galaxies away from Homo sapien.

[696] In fact, Thaler still thinks of him like a half -alien from the planet Vulcan.

[697] Mr. Spock on Star Trek.

[698] Logical.

[699] He was an econ.

[700] And if you remember, he found humans quite amusing.

[701] You'd make a splendid computer, Mr. Spock.

[702] That is very kind of you, Captain.

[703] Homo Economicus is not human, because he doesn't have a brain.

[704] He has a utility function, a simple formula for obtaining his needs and wants.

[705] And this utility function comes complete with superpowers, like constrained optimization, a power that makes him ridiculously good at making himself the happiest he can be.

[706] Why would economists cling to assumptions like this?

[707] There were things that comes down to how hard the math becomes without it.

[708] It's very much the case that neoclassical economics and the concept of homo -economics has evolved in part because of the limited rationality of economists.

[709] And by that I mean, constrained optimization problems are the easiest ones to solve.

[710] Trying to solve problems where people behave differently depending on what mood they're in and if the probabilities they assign to various outcomes aren't the correct ones, it's very hard to do in a mathematical way.

[711] Now, we're making a lot of progress on that.

[712] in the wilderness, Thayer is now the president of the American Economic Association, the main professional organization for U .S. economists.

[713] As for the profession, I'm pretty optimistic.

[714] The younger crowd seems open -minded.

[715] Thelor says those becoming economists, at least at the graduate school level, are being taught ideas from behavioral economics, and that behavioral insights are becoming more widely accepted by his profession.

[716] The most cantankerous objectors are the, ones closer to my age.

[717] And whether or not it's rational for him to be, Thaler is optimistic about the future.

[718] I hope that 50 years from now, maybe sooner, the field of behavioral economics will no longer exist, and economics will just be as behavioral as it needs to be.

[719] That was Greg Rizalski, a producer here at Freakonomics Radio.

[720] Next week on the show, there are certain crimes for which the criminal pays and pays.

[721] and pays.

[722] I'm guessing the first year that an individual is charged and convicted, they're going to be easily in the $10 ,000 range.

[723] Why is it so costly to be a sex offender?

[724] That's next time on Freakonomics Radio.

[725] Freakonomics Radio is produced by WNYC and Dubner Productions.

[726] Our staff includes Greg Rosalski, Caroline English, Susie Lectenberg, Merritt Jacob, and Christopher Worth.

[727] We had help this week from David Herman, Daniel DeZula, and Wayne Schulmeister.

[728] If you want more Freakonomics Radio, you can subscribe to our podcast on iTunes or go to Freakonomics .com, where you'll find lots of radio, blog, the books, and more.