The importance of revealed preference
The market will reflect what most people care about, because what most people care about is reflected in the market If they cared about it would win in the market (at least sometimes) If not, it would not It did not win, so people do not value it, or there was not a true market For many years, no one tested the theory, for this reason– it seemed obvious and any test was met with dismissal as “not really a market.” Enter psychologists…
This indifference curve should hold over a variety of procedures and contexts.
Utility is a quantity that can be measured.
Utility is a quantity like length or weight.
When you ask someone to make a decision, you are measuring the quantity, as you would measure length with a ruler or weight with a scale.
The measurement shouldn’t change the quantity.
Violations of Procedural Invariance
Often termed “anomalies,” “context effects,” or “preference reversals.”
Their study is sometimes called “behavioral economics.
We eat chocolate cake when we shouldn't, drink beer, excercise, and do drugs. Even though we may not want these in the long run.
Preference Schedules and Ethical Behavior
Will we listen to our now selves or our later selves?
Preference and Self-Control
Sometimes people will choose the less valuable option just to help them control themselves in the short-run.
In a sense, they will choose the less attractive option on purpose.
This applies to many ethical decisions, both good and bad.
Why do we do this?
Hot/visceral responses versus Cold/deliberative responses
Planners versus doers
(note that both preferences are “real”)
Which one wins at the voting both? Which one do we like to pretend always wins?
Stale popcorn and endless soup bowls
Examples of “paying for self-control”
Christmas clubs and mental accounting
Huge cowbell keys
Locked up business supplies
Loss aversion examples
Excluding versus including options.
Giving up versus getting ethical goods.
Lots of good marketing potential here! And lots of potential for steering yourself/your team toward the ethical option.
Our different selves
love my car; I hate the bus. Yet I vote for candidates who promise to tax gasoline to pay for public transformation. I send my dues to the Sierra Club to protect areas of Alaska I shall never visit… The political causes I support seem to have little or no basis in my interests as a consumer, because I take a different point of view when I vote and when I shop. I have an “Ecology Now” sticker on a car that drips oil everywhere it is parked.
-Mark Sagoff (1988) The Economy of the Earth: Philosophy, Law, and the Environment
Now self vs Future Self
What are potential solutions to anomalies?
What about solutions to areas where the market cannot produce the best outcome even without anomalies?
What should be “off limits”?
What aspects of life, if any, are irrelevant to markets?
Government, laws, courts
(which we will talk about later in the course)
Alternatives to outright laws banning behaviors– nudges as laws/rules?
Human behavior does not always follow a normative pattern
Utility is not as straightforward as we might have suspected
These problems tend to be exacerbated when ethics are involved
Visceral needs versus rational/moral minds
Non-normative influences on our behavior
Mindless influences on our behavior
A modern, informed business ethics approach takes these issues into account and has an increased chance of success.