Kluge: The Haphazard Construction of the Human Mind

wheat relative to a baseline of 100 kilos isn’t going to matter if everything after the first kilos ultimately spoils; what really matters is the difference between starving and not starving. Of course, money doesn’t rot (except in times of hyperinflation), but our brain didn’t evolve to cope with money; it evolved to cope with food.

And so even today, there’s some remarkable crosstalk between the two. People are less likely to donate money to charities, for example, if they are hungry than if they are full; meanwhile, experimental subjects (excluding those who were dieting) who are put in a state of “high desire for money” eat more M&Ms during a taste test than do people who are in a state of “low desire for money.”[21] To the degree that our understanding of money is kluged onto our understanding of food, the fact that we think about money in relative terms may be little more than one more accident of our cognitive history.

“Christmas Clubs,” accounts into which people put away small amounts of money all year, with the goal of having enough money for Christmas shopping at the end of the year, provide another case in point. Although the goal is admirable, the behavior is (at least from the perspective of classical economics) irrational: Christmas Club accounts generally have low balances, so they tend to earn less interest than if the money were pooled with a person’s other funds. And in any event, that money, sitting idle, might be better spent paying down high-interest credit card debt. Yet people do this sort of thing all the time, establishing real or imaginary accounts for different purposes, as if the money weren’t all theirs.

Christmas Clubs and the like persist not because they are fiscally rational but because they are an accommodation to the idiosyncratic structure of our evolved brain: they provide a way of coping with the weakness of the will. If our self-control were better, we wouldn’t need such accommodations. We would save money all year long in a unified account that receives the maximum rate of return, and draw on it as needed; only because the temptation of the present so often outweighs the abstract reality of the future do we fail to do so such a simple, fiscally sound thing. (The temptation of the present also tends to leave our future selves high and dry. According one estimate, nearly two thirds of all Americans save too little for retirement.)

Rationality also takes a hit when we think about so-called sunk costs. Suppose, for instance, that you decide to see a play and plop down $20 for a ticket — only to find, as you enter the theater, that you’ve lost the ticket. Suppose, further, that you were to be seated in general admission (that is, you have no specific assigned seat), and there’s no way to get the ticket back. Would you buy another ticket? Laboratory data show that half the people say yes, while the other half give up and go home, a 50-50 split; fair enough. But compare that scenario with one that is only slightly different. Say you’ve lost cash rather than a prepurchased ticket. (“Imagine that you have decided to see a play, and the admission is $20 per ticket. As you enter the theater, ready to purchase one, you discover that you have lost a $20 bill. Would you still pay $20 for a ticket for the play?”) In this case, a whopping 88 percent of those tested say yes — even though the extra out-of-pocket expense, $20, is identical in the two scenarios.

Here’s an even more telling example. Suppose you spend $100 for a ticket to a weekend ski trip to Michigan. Several weeks later you buy a $50 ticket for another weekend ski trip, this time to Wisconsin, which (despite being cheaper) you actually think you’ll enjoy more. Then, just as you are putting your newly purchased Wisconsin ski-trip ticket in your wallet, you realize you’ve goofed: the two trips take place on the same weekend! And it’s too late to sell either one. Which trip do you go on? More than half of test subjects said they would choose (more expensive) Michigan — even though they knew they would enjoy the Wisconsin option more. With the money for both trips already spent (and unrecoverable), this choice makes no sense; a person would get more utility (pleasure) out of the trip to Wisconsin for no further expense, but the human fear of “waste” convinces him or her to select the less pleasurable trip.[22] On a global scale, the same kind of dubious reasoning can have massive consequences. Even presidents have been known to stick to policies long after it’s evident to everyone that those policies just aren’t working.

Economists tell us that we should assess the value of a thing according to its expected utility, or how much pleasure it will bring,t buying only if the utility exceeds the asking price. But here again, human behavior diverges from economic rationality. If the first principle of how people determine value is that they do so in relative terms (as we saw in the previous section), the second is that people often have only the faintest idea of what something is truly worth.

Instead, we often rely on secondary criteria, such as how good a deal we think we’re getting. Consider, for example, the question posed in Bob Merrill’s classic sing-along: “How much is that doggie in the window?” How much is a well-bred doggie worth? Is a golden retriever worth a hundred times the price of a movie? A thousand times? Twice the value of a trip to Peru? A tenth of the price of a BMW convertible? Only an economist would ask.

But what people actually do is no less weird, often giving more attention to the salesperson’s jabber than the dog in question. If the breeder quotes a price of $600 and the customer haggles her down to $500, the customer buys the dog and counts himself lucky. If the salesperson starts at $500 and doesn’t budge, the customer may walk out in a huff. And, most likely, that customer is a fool. Assuming the dog is healthy, the $500 probably would have been well spent.[23]

To take another example, suppose you find yourself on a beach, on a hot day, with nothing to drink — but a strong desire for a nice cold beer. Suppose, furthermore, that a friend of yours kindly offers to get you a beer, provided that you front him the money. His only request is that you tell him — in advance — the most you are willing to pay; your friend doesn’t want to have the responsibility of deciding for you. People often set their limit according to where the beer is going to be purchased; you might go as high as $6 if the beer is to be purchased at a resort, but no more than $4 if the friend were going to a bodega at the end of the beach. From an economist’s perspective, that’s just loopy: the true measure should be “How much pleasure would that beer bring me?” and not “Is the shop/resort charging a price that is fair relative to other similar establishments?” Six dollars is $6, and if the beer would bring $10 of pleasure, $6 is a bargain, even if one spends it at the world’s most expensive bodega. In the dry language of one economist, “The consumption experience is the same.”

The psychologist Robert Cialdini tells a story of a shopkeeper friend of his who was having trouble moving a certain set of necklaces. About to go away for vacation, this shopkeeper left a note for her employees, intending to tell them to cut the price in half. Her employees, who apparently had trouble reading the note, instead doubled the price. If the necklaces didn’t budge at $100, you’d scarcely expect them to sell at $200. But that’s exactly what happened; by the time the shopkeeper had returned, the whole inventory was gone. Customers were more likely to buy a particular necklace if it had a high price than if it had a low price — apparently because they were using list price (rather than intrinsic worth) as a proxy for value. From the perspective of economics, this is madness.

What’s going on here? These last few examples should remind you of something we saw in the previous chapter: anchoring. When the value we set depends on irrelevancies like a shopkeeper’s starting price as much as it does on an object’s intrinsic value, anchoring has clearly cluttered our head.

Anchoring is such a basic part of human cognition that it extends not just to how we value puppies or material goods, but even to intangibles like life itself. One recent study, for example, asked people how much they would pay for safety improvements that would reduce the annual risk of automobile fatalities. Interviewers would start by asking interviewees whether they would be willing to pay some fairly low price, either ?25 or ?75. Perhaps because nobody wished to appear to be a selfish lout, answers were always in the affirmative. The fun came after: the experimenter would just keep pushing and pushing until he (or she) found a given subject’s upper limit. When the experimenter started with ?25 per year, subjects could be driven up to, on average, ?149. In contrast, when the experimenter started at ?75 per year, subjects tended to go up almost 40 percent higher to an average maximum of ?232.

Indeed, virtually every choice that we make, economic or not, is, in some way or another, influenced by how the problem is posed. Consider, for example, the following scenario:

Imagine that the nation is preparing for the outbreak of an unusual disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimates of the consequences of the programs are as follows:

If Program A is adopted, 200 people will be saved.

If Program B is adopted, there is a one-third probability that 600 people will be saved and a two-thirds