Given the choice between a) earning $50,000/year while other people make $25,000 and b) earning $100,000/year while others make $250,000, which would you choose (and assume that prices stay the same)? Most people choose a) indicating that they would rather make less in an absolute sense as long as it’s more in a relative sense.
Here’s another one. Two stores are holding a contest to reward their millionth customer. At the first store, you are the millionth customer and win $100. At the second store, the person in front of you is the millionth customer and wins $1,000 while you win $150. Surprisingly, most people would rather be at the first store.
We have previously blogged about some of the irrational behavior of individuals. Michael Shermer, the Founding Publisher of Skeptic magazine and Adjunct Professor of Economics at Claremont Graduate University, has written a new book call The Mind of the Market in which he discusses why people are so emotional and irrational when it comes to money and business decisions. Here’s an essay from his site regarding the book. Looks pretty interesting.
One thing about the millionth-customer finding. The difference between $100 and $150 isn't particularly large. But--being the millionth customer is likely to lead to some public recognition--nme in the paper, whatever--which might be worth something. So the real question is--how much wo you have to get as the 1,000,001th customer to prefer that to being the millionth customer?
ReplyDeleteWithout sounding too haughty, I might point out that all prices are relative. The earner in choice A earns twice as much as his competitors, leaving one to conclude he could consume twice as much, given simple assumptions.
ReplyDeleteIn choice B, the earner earns LESS THAN HALF as much as his competitors making him far worse off than he would have been if he were the loser in the first example.
Sounds like a rational choice to me. If each outcome is equally like, I'll get hurt on average. If I have a choice in the matter, I'll hedge.
For fun, if we assume more than one other competitor in option B, one might feel fairly undervalued.
A comment from the original post, is well deserved here too!
ReplyDeleteAlex Says:
January 23rd, 2008 at 12:06 pm
Correct me if I’m wrong, but isn’t the whole point of evolution and survival of the fittest basically about trying to pass on your genes as efficiently as possible, i.e. copulating with as many females as you can (in case you are a male, of course)?
Let me make this clearer:
Assumption/Premise 1: You are a male.
Assumption/Premise 2: A female will rather copulate with the fittest male.
Assumption/Premise 3: The fittest male = the most powerful male = the richest male.
Scenario: Would you rather earn $50,000 a year while (all) other males make $25,000, in which case you are the fittest male, and hence get all the girls? Or would you rather earn $100,000 a year while (all) other males get $250,000, in which case you are the weakest male, and hence never get laid?
Surprisingly — stunningly, in fact — my intuition tells me that the majority of males will select the first option; they would rather make twice as much as other males even if that meant earning half as much as they could otherwise have and getting twice as many girls – because that would help their genes. How rational is that?
By the way, the tone of this letter is meant for comedic purposes only.