Peter A. Ubel is professor of medicine and psychology at the University of Michigan at Ann Arbor, where he explores the quirks in human nature that influence our health, happiness and society. He is author of the book Free Market Madness (Harvard Business School Press, 2009), which investigates the irrational tics that lead people to overbid on eBay, eat too much ice cream and take out mortgages they cannot afford. In an interview with Jonah Lehrer, Ubel explains how innate optimism, greed and ignorance can depress financial and physical well-being—and how individuals can commit to change.
Scientific American Mind: Your new book, Free Market Madness, argues that conventional economics, which assumes that humans are rational agents acting in their own self-interest, is deeply naive and scientifically unrealistic. Instead you describe a brain brimming with biases and flaws. Do you think these flaws are responsible for the latest economic turmoil? If so, how?
Peter Ubel: Irrationality is responsible for the economic mess we find ourselves in
right now—irrationality plus greed, of course, and a substantial dose of ignorance. Let us start with ignorance. I am sad to say that many Americans have a difficult time with even simple math—around a third of American adults cannot calculate 10 percent of 1,000. People who struggle with concepts such as percents have an extremely difficult time with more complicated ideas, such as compounding of savings and, very relevant to our current crisis, adjustable-rate mortgages.
To make matters worse, most of us are hardwired for optimism. Ask us how we rate as drivers, and the vast majority of us are convinced we are above average—even those of us who have gotten into multiple car accidents. As a result of our unrealistic optimism, we are convinced that our incomes will rise fast enough to keep up with our outsized mortgage, or that our adjustable rate will not rise, or that our house’s value will indefinitely outpace inflation. We are social beings, too, and frequently judge our own decisions by seeing what other people are doing. If my neighbor added on a new kitchen with a home equity loan, I might assume that is a good idea for me, even if a more rational weighing of my finances would suggest otherwise. Even savvy financiers can get caught up in irrational impulses. If a competitor’s firm makes huge profits on risky loans, it is easy for me to push aside my fears about such risks: if he took those risks and was rewarded, maybe I overestimated the risks!
Mind: What can eBay teach us about human irrationality?
Ubel: eBay auctions help to reveal the rational and irrational forces driving consumer behavior. People are often quite rational, after all. Raise the price of a T-shirt, and generally, fewer people will buy it. Reduce the quality of a good, and you better reduce its price, too! But behavioral economists have analyzed eBay data to help identify some ways that consumers act irrationally. [For more on eBay and irrationality, see “Is Greed Good?” by Christoph Uhlhaas; Scientific American Mind, August/September 2007.] Offer a really low price for opening bids, a price everyone knows will not be the final selling price, and you nonetheless lure some consumers into making an initial bid. That increases the number of people bidding on the product, which makes it look more attractive, thereby generating even more bids. And then bidders, who knew the price would rise from their initial bids, get emotionally attached to the product and keep raising their offers. Now you know why it makes sense to tell people that bids for that Picasso hanging in your living room can start at $5!
Mind: You also argue that by taking our own irrationality into account, we can improve our health and well-being. Can you provide an example of a way to achieve such improvement?
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Add CommentIf you REALLY want to understand the Founding Father's intent for a truly Free Market Economy, what caused this mess, and how we can get out of it then I heartily recommend the book by Thomas E. Woods, Jr. entitled "Meltdown", available at BDalton and other booksellers.
Reply | Report Abuse | Link to thisThe "irrationality" comes in believing that those who got us into this mess can get us out of this mess or that further interference or continued interference in the Free Market will somehow prevent it from happening again. The further irrationality comes from the refusal to see the deliberate steps and stages to destroy America from within that were set in motion from the very founding of this nation and culminated in the Federal Reserve Bank (a private corporation owned and controlled by the international bankers whom they bailed out), the Internal Revenue Service (confiscation of personal wealth through tax extortion ... the power to tax is the power to destroy), the Social Security Administration (the penultimate Ponzi Scheme), the inflation and debauching of the currency causing the raising of the minimum wage to the point that it is no longer possible for one working individual to earn the multiples of the minimum wage it takes to earn a Middle Class income (thus destroying the Middle Class), the Transfers of Wealth via War, Foreign Aid, Entitlements and a host of other such schemes. And the Last Blow, the International Monetary Fund (or other such) with absolute control of all monetary systems of the world and even a ONE WORLD CURRENCY. All with the false benevolence of "saving the world's economy". And from whence, and why does all of this come? When we are disconnected from the Source of All Life (God) our energy supply is cut off and alternate sources of energy must be found to sustain a facsimily of life. Vampirisation in one form or another is the only alternative, stealing energy, raping energy, confiscating , taxing, transferring, estorting give it your own name.
Jesus saved us by re-establishing the connection to the Source (God) via his Sacred Heart Flame until such time as we have fully re-established ourselves in our own connection via our own 3-Fold Unfed Flame in the Secret Chamber of the Heart chakra.
We use energy in creating our wealth through the work of our hands. That energy is represented by a medium of exchange, a currency which we all agree is equivalent and with which we can then purchase goods and services. Those that debauch the currency dilute the lifeblood of the economy until it dies of suffocation.