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Saturday, January 14, 2006

"The Fetters of Ignorance, Self-Deception and Intemperance"

Does the “consumer ... need to be coaxed and wheedled into responding to market choices with sufficient diligence”?:

The aggro of the agora, Consumers fail to measure up to economists' expectations, The Economist: “We must accept the consumer as the final judge,” wrote Frank Taussig, a former president of the American Economic Association (AEA), in 1912. ... The AEA's latest annual meeting ... made one thing abundantly clear: this ritual deference to consumer sovereignty is slipping. ... John Campbell, president of the American Finance Association (AFA), dwelt on the failure of households to hold enough shares, diversify their assets fully or refinance their mortgages promptly. Meanwhile, Daniel McFadden, the AEA president, argued that the unshackling of markets, which has proceeded apace since the 1980s, would fall short of its promise if consumers were not similarly freed from the fetters of ignorance, self-deception and intemperance.

Mr McFadden's speech leaned on the work of neuroeconomists, who claim to prove what Adam Smith long ago asserted: man's “propensity to truck, barter and exchange” runs deep in our nature. According to brain scans, it lurks in the same primitive, limbic vaults of the cerebrum as our instinct to fight, flee and feed ourselves. Indeed, “shopping and sex share the same neurotransmitters and receptors,” Mr McFadden jokes.

But if trading turns some people on, it puts others off. Markets can be “rough, murky, tumultuous places”. Consumers may doubt themselves, the products on display and the people flogging them. Losing out—paying too much—is an ever-present danger. This can be character-building, of course. By punishing a consumer's mistakes and inconsistencies, the market may whip him into shape, so that he more closely resembles the rational actor an efficient market deserves. But Mr McFadden worries that consumers may instead develop an aversion to markets: “Opportunities for choice may be interpreted as opportunities for mistakes, embarrassment and regret.” He calls this agoraphobia. In common parlance, this is a fear of open spaces; translated literally from Greek, it means “fear of the marketplace”. ... “Consumers find trade an edgy experience...and resist trading for small gains.” ...

Mr McFadden takes ... this a step further. The “consumer may need to be coaxed and wheedled into responding to market choices with sufficient diligence,” he says. For his predecessors, such as Taussig, this is heresy. The consumers' choices are the data—the given things—of economics. It is only by observing a consumer's choices that economists can infer his preferences. Thus to argue that we know what's best for consumers, independent of what they have chosen for themselves, is a failure of logic as well as the height of presumption. If our theory fails to explain their behaviour, it is our problem, not theirs. Mr McFadden seems tempted by the opposite conclusion. If economic theory fails to reflect consumer behaviour, perhaps consumers can be remoulded, better to serve the theory.

    Posted by on Saturday, January 14, 2006 at 12:15 AM in Economics | Permalink  TrackBack (1)  Comments (9)

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