This file is needed to answer question 4 of my assignment.
someTitle 15 HOMERECONOMICUSORHOMERSAPIENS? BehavioralEconomicsinTheSimpsons JodiBeggs BEHAVIORALECONOMICS is an emerging field at the intersection of psychology and traditionaleconomics.Ifyou’veevertakenaneconomicscourse,youmayrecallthatoneofthe central assumptions of nearly all traditional economic models is that individuals and companiesact“rationally”—thatis,inwaysthatmaximizetheirlong-termhappinessorwell- being.1Sincetheworldisacomplexplace,thisassumptiontechnicallyrequiresthateveryone has(oratleastactsasthoughtheyhave)unlimitedinformation-processingcapabilities,perfect self-control, complete and objective knowledge regarding the usefulness of every item availableforpurchase,andsoon.It’snothard,however,tolookaroundatourneighbors,our friends,andprobablyevenourselvestoseethatthisassumptionisunreasonablewhenapplied literallyintherealworld. Traditional economists acknowledge that people aren’t perfect, but they contend that the “errors” in judgment that people make are reasonably random and just create noise in an otherwise well-functioning economic world. Behavioral economists, on the other hand, are interested in describing the ways in which people exhibit consistent irrational biases in decisionmakingandjudgment.Toerrishuman,asthesayinggoes,andbehavioraleconomists wanttounderstandthewaysinwhicheconomicactorsare,well,human.2 It’sgenerallymoreentertainingtowatchhumansthantowatcheconomicrobots,soit’snot surprising that movies, books, and television shows generally focus on characters who are imperfect,insomewaysirrational,andoftendownrightgoofy.TheSimpsons isnoexception to this model, and the world has had the privilege of watching the characters’ economic missteps for the past twenty-one years. Shortly after we meet him for the first time, for example,wewatchHomerSimpsontakehispaychecktothedogtrackandbetonSanta’sLittle Helper(at99:1oddsnoless)becausehetookthedog’snameasasign.3It’sunlikelythatthis wastheoptimalwayforHomertospendhispaycheck(justaskMarge),andit’scertainlynota soundbettingstrategy.4Therefore,theviewerisprobablynotshockedthat,ratherthangetting thebigpayouthewasconvincedhehadcoming,HomerendsupwithSanta’sLittleHelperasa pet. In general, the fascinating part about the members of the Springfield community is that, despitebeingfictionalcharacterscreatedforentertainmentpurposes,theirbiasescorrespond quitewelltothoseobservedbybehavioraleconomistsinrealpeople.Lisaevennotesinthe firstepisodeoftheshowthatHomerhasthesamefrailtiesasallhumanbeings,5andthistheme iscertainlyexemplifiedthroughouttheshow,perhapseventoalargerdegreethanthewriters realized.Thischapterprovidesanintroductiontosomeofthebasicprinciplesofbehavioral economics and shows the ways in which the characters in The Simpsons embody these principles.Thefollowingdiscussionisinnowayanexhaustiveintroductiontothesubject,as Homer Economicus : The Simpsons and Economics, edited by Joshua Hall, Stanford University Press, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/sfu-ebooks/detail.action?docID=1659899. Created from sfu-ebooks on 2022-09-30 20:51:16. C op yr ig ht © 2 01 4. S ta nf or d U ni ve rs ity P re ss . A ll rig ht s re se rv ed . therearetoomanyconceptsinbehavioraleconomicstobecoveredinonechapter.Instead,it covers a smattering of topics that are particularly relevant to the show and, it is hoped, particularlyinterestingtothereader.Thechapterconcludeswithadiscussionofhowirrational and“human”thecharactersareoverall. Time-Inconsistency,Procrastination,andCommitmentDevices Weneedonlytakeaquicklookattheworldaroundusinordertoberemindedthatself-control problemsareafactoflife.Let’sfaceit—weprocrastinate,weeattoomuch,wedon’tgotothe gymenough,andwedon’tsaveenoughforretirement,evenwhendoingtoomuchortoolittle oftheseactivitiesisatoddswithourlong-termhappiness.Traditionaleconomistsdon’thavea goodwaytoaccountforthisbehaviorbecauseitcontradictstheassumptionthateveryoneisa perfectly rational utility maximizer. Everyone is “time-consistent” in the traditional economist’sworld,whichmeansthatpeople’schoicesnevercausethemtoeverlookbackand say,well,“D’oh!”6 Homer,ontheotherhand, iscertainlynot time-consistent,ashispreferencesforactivities often seem to change fromonemoment to the next.Consider the time thatHomer vowed to neverdrinkanotherbeer—and then thebeervendorcamebyandHomerdecided tobuy ten beers.7OrthetimethatHomervowedtonotlookforwardtoanything—andthenimmediately gotexcitedaboutatwo-for-onesaleonpianobenches,ofcourse.8EvenHomer’sresolutionto nevereatchiliagainonlylastedforafewseconds,orexactlyuntilhewaspresentedwithmore chili.9 Economistsacknowledgethattimingisanimportantfactorincalculatinghappinessorutility —afterall,it’sprettyeasytoseethatreceiving$10todayismoreattractivethanreceiving$10 a year from now.10 Therefore, when calculating happiness, it’s important to discount future costsandbenefitscomparedtothosethatoccurinthepresent.Forexample,maybegetting$10 inoneyearmakesyouashappyasgetting$9todaywould.Traditionaleconomistswouldinfer thatyourfutureisdiscountedat10percentperyearandwouldconcludethat$11.11paidout two years from now is also equivalent to $9 today, and so on.11 In other words, these hypothetical numbers imply that youwould bewilling to delay gratification as long as that gratificationincreasedbyenoughtocounteractthe10percentdiscountonitforeachyearyou are keptwaiting. This approach has the nice feature of the time-consistency just described, sincetheoptimalchoicesfromtoday’sperspectivewillstillbeoptimalinthefuture.12Onthe otherhand,themodelsuffersaconsiderableweaknessinthatitcan’texplainthebehaviorthat Homerexhibits. Behavioral economistsuse thenotionof time-inconsistency toexplainprocrastinationand the overwhelming desire for immediate gratification, and they employ a concept called hyperbolic discounting to model this type of bias.13 In hyperbolic discounting models, behavioraleconomistsnotonlydiscountfuturecostsandbenefitsasjustdescribed,theyalso addanadditionaldiscountfactorthatappliesequallytoallfuturecostsandbenefits(butnotto currentcostsandbenefits).Continuingthepreviousexample,ifweassumethatthisadditional discount factor is another 10 percent, hyperbolic discounting implies that $9 today is Homer Economicus : The Simpsons and Economics, edited by Joshua Hall, Stanford University Press, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/sfu-ebooks/detail.action?docID=1659899. Created from sfu-ebooks on 2022-09-30 20:51:16. C op yr ig ht © 2 01 4. S ta nf or d U ni ve rs ity P re ss . A ll rig ht s re se rv ed . equivalentto$11.11oneyearfromnow,$12.35twoyearsfromnow,andsoon.Alternatively, wecouldnotethatthesepreferencesimplythatyouwouldbewillingtodelayafuturepayout byoneyearifthepayoutincreasedbyenoughtocounteracta10percentdiscount(asbefore), but the payoutwould need to increase by enough to overcome two 10 percent discounts in ordertomakeyouwillingtodelayfromtodaytooneyearinthefuture. This feature in the model reflects the observation that, while people would rather get somethingoneday fromnow thanget it twodays fromnow(andviceversa forcosts), they reallyprefergettingthingstodayratherthangettingthemtomorrow.Time-inconsistencyoccurs whenthepayoutincreasesbyenoughtodelaygratificationfromonefuturedaytothenextbut doesn’tincreaseenoughtodelaygratificationfromtodayuntiltomorrow.14Intheexample,ifa payoutoptionstartingseveralyearsfromnowincreasesby15percentperyear,youwouldsay todaythatyouwouldwaitindefinitelytocashin.However,whenthefuturerollsaroundand thepayoutisavailableinthepresent,thedesireforimmediategratificationtakesoverandyou willdecide that the extra15percentno longermakeswaitingworthwhile.Whenapplied to costsrather thanbenefits, thismodel implies thatevenwhen“doingit tomorrow”is thebest choice right now, it’s no longer the preferred option when tomorrow becomes today. Procrastination,therefore,occursbecauseindividualsfinditintheirshort-termbestinterests torenegeontheirearlierdecisionsandpostponeactionwhenthetimetoactrollsaround.For example,whenHomerwantstogotothemalltomeetMr.T,hetellshimselfoverandoverthat he’lljustgoalittlelater,butwhenhefinallyovercomeshisprocrastinationanddecidestogo, it’stoolateandhemisseshisopportunitywithMr.T.15HomerSimpsonisluckyinthatallhe missedwasmeetingMr.Tatthemall,sincecounterproductiveprocrastinationtendstopopup inmanyimportantfacetsoflife. The key to overcoming procrastination is recognizing that the future always eventually becomesthepresent.Unfortunately,noteveryoneisadeptatthistask,andHomerseemstobe particularlylackinginthisdepartment.Notsurprisingly,whenspeakingtohis loanofficerin “NoLoanAgain,Naturally,”Homerclaimsthathewastoldthathewouldn’thavetorepaythe moneyheborroweduntilthefutureandthenbalksathisresponsibilityonthegroundsthatit’s stillthepresentratherthanthefuture. On the basis of this evidence, it’s tempting to conclude that Homer is what behavioral economists(andlikelymostoftheworld)callnaive.Inthecontextoftime-inconsistencyand procrastination, onewho is naive is unawareof his or her own time-inconsistency. In other words,whenHomerchoosestoputoffactivitiesuntilthefuture,heseemstohonestlybelieve thatwhenthefuturearrivesheisgoingtomakegoodonhisearlierchoices.“Sophisticated” individuals,ontheotherhand,areawareofwhattheirpreferencesaregoingtolooklikeinthe future,andtheycanthereforecontroltheirprocrastinationwithreasoningoftheform“Well,I don’twanttodoitnow,butI’mnotgoingtowanttodoittomorrowwhentomorrowbecomes noweither,soImightaswellgetitoverwith.” Individualswhoareawareoftheirownprocrastinationtendenciescansometimesjustsuck itupandforcethemselvestocompleteunpleasantactivitiesinatimelymanner.Forexample, NedFlandersprobablyrealizesthatheisnevergoingtowanttodohis taxes,sohegetsthe taskoverwith as soonaspossible, evengoing so far as to showupat thepostoffice right whenitopensonthefirstdayoftheyear.16(Alternatively,it’spossiblethatheactuallylikes Homer Economicus : The Simpsons and Economics, edited by Joshua Hall, Stanford University Press, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/sfu-ebooks/detail.action?docID=1659899. Created from sfu-ebooks on 2022-09-30 20:51:16. C op yr ig ht © 2 01 4. S ta nf or d U ni ve rs ity P re ss . A ll rig ht s re se rv ed . doing his taxes—after all, it is Ned Flanders.) The rest of the town, in contrast, is shown waitinginlong,franticlinestomailtheirtaxformsatthelastminute. Sometimespeoplecan’tjustforcethemselvestobehaverationallyandnotprocrastinate,so they instead turn towhat economists call commitmentdevices.Commitmentdevices, simply put,areschemesthatservetorestrictanindividual’sfuturechoicessothatsheisforcedtoact in ways consistent with her long-term self-interest. For example, Christmas clubs—savings accountsforwhichdepositorspaytohavetheirsavingstiedupuntiltheholidayseason—have historicallybeenpopularcommitmentdevices,andtheconceptcanbetracedallthewayback toancientmythology,whenUlysseshashiscrewtiehimtohisship’smastsbecauseheknows thathewon’tbeabletoresisttheSirens.17 Despitetheearliernaiveprocrastinationexamples,thepresenceofcommitmentdevicesasa recurring theme throughout the series implies that Homer and his comrades are at least partiallyawareoftheirownweaknesses.Eveninthefirstepisode,aChristmasclubislisted asanitemthatgetstakenoutofHomer’sSantaClauspaycheck.18In“Bart’sDogGetsanF,” Homerarguesthatthefamilyhastocommitthemselvestoputouttheadtofindanewowner forSanta’sLittleHelperbeforethedogfailshisobediencetest.In“BloodFeud,”Bartmailsa letter thatHomerwrote toMr.Burns because he thought thatHomermight change hismind otherwise.In“HeLovestoFlyandHeD’ohs,”Homer’slifecoachconvinceshimtoquithis job so that he ismore committed to finding a better job. Homer even employs an ultimate commitmentdevicewhenhegetshisstomachstapledin“HusbandsandKnives.” Reference-DependentUtility,NarrowBracketing,andtheEndowment Effect Economistsobservethatpeoplegenerallyexhibitrisk-aversebehaviorintheirdailylives—for example,most peoplewould take a guaranteed payout of $50 over a 50 percent chance of winning$100.19 (In fact,many peoplewould likely prefer a guaranteed payout of, say, $45 rather than a 50 percent chance of $100.) Traditional economists assume that people form preferencesoverriskychoicesbycomparingtheexpectedlevelsoftheiroverallwealthinall scenarios. In the initial example, traditional economists model the decision as a choice betweenone’scurrentnetworthplus$50versusa50percentchanceofcurrentnetworthplus $100. Behavioral economists take this concept a step further and theorize that, in addition to consideringresultinglevelsofwealthwhenmakingadecision,peoplealsothinkspecifically about whether an outcome represents a gain or a loss. More specifically, behavioral economistshavefoundthatpeopletendtoevaluateoutcomesinrelationtosomepsychological referencepoint,andtheygenerallyfeelabouttwiceasmuchpainfromwhattheyperceiveasa lossastheydopleasurefromanequivalentgain.20Therefore,peoplearenotonlyriskaverse butalso“lossaverse,”accordingtobehavioraleconomists.Thisfindingisimportantbecause itimpliesthatpeoplearesensitivetotheframingofchoicesandoutcomesasgainsandlosses. In particular, individuals are more sensitive to what they perceive as explicit losses as opposed to foregone gains.As a result,Homerwould probably have been less upset about Marge’srefusaltolieincourtifhecouldhaveframedtheresultingzero-dollarsettlementasa Homer Economicus : The Simpsons and Economics, edited by Joshua Hall, Stanford University Press, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/sfu-ebooks/detail.action?docID=1659899. Created from sfu-ebooks on 2022-09-30 20:51:16. C op yr ig ht © 2 01 4. S ta nf or d U ni ve rs ity P re ss . A ll rig ht s re se rv ed . foregone gain rather than thinking thatMarge cost him a million dollars, even though both scenariosresultinthesamedollaroutcome.21 Inaddition tobeing lossaverse,Homer issusceptible towhatbehavioraleconomistscall “narrow bracketing”—examining choices and outcomes in isolation rather than in a larger context.In“LadyBouvier’sLover,”forexample,HomerfindsoutthatBartcharged$350on hiscreditcard.Ontheupside,BartgivesHomer$350incashtomakeupforit.Unfortunately, oratleastirrationally,Homerseemstohaveacclimatedprettyquicklytotheideaofthe$350 being charged to his credit card, sowhenBart hands him the cash he sees it as a gain and decidestousethecashtobuyseventytranscriptsofNightline.Arationalindividual,ofcourse, wouldrecognizethatthetwotransactionsjustcanceleachotherout,butinsteadHomerreacts asthoughhehasbeengivenagift.22Inasimilarvein,Homerperceivesalossandgetsupset whenhis“youmayalreadyhavewon”checkcan’tbecashed,eventhoughthissetbackdidn’t resultinanactualloss.23 Furthermore, in “Simpsoncalifragilisticexpiala(D’oh)cious,” Bart supposedly takes up smokingand thenoffers toquit inorder tohelp the family savemoney.HomergivesBart a dollarasarewardforquittingsmoking(since,accordingtoHomer,givingupsmokingisone ofthehardestthingsBartwilleverhavetodo),eventhoughBarthadonlytakenupsmokingfor thepurposeofhavingsomethingtogiveup.Lisa,alwaysthevoiceofreason,pointsout that Bartdidn’tactuallydoanythingandthusdoesn’tdeserveareward,butHomerisunconvinced. Theconceptofnarrowbracketingandmyopia(short-sightedness)canevenexplainthemany instancesofgamblingshownthroughouttheseries. Asymmetry in the perceptions of gains and losses (as well as the psychology of ownership24)resultsinaphenomenonknownasthe“endowmenteffect.”Haveyoueverbeen givenan itemand later felt a strange reluctance togive it up, even thoughyoudidn’t really want the item in the first place? Daniel Kahneman, Jack Knetsch, and Richard Thaler documented this phenomenon in a series of experiments involving Cornell University undergraduates and Cornell bookstore coffee mugs.25 As a first step, they randomly chose studentstoreceivecoffeemugs.Theythenaskedstudentswhohadmugstoreporttheminimum amounttheywouldbewillingtoselltheirmugsfor,andtheyaskedthemuglessstudentshow much they would be willing to pay for one of the mugs. Since the mugs were randomly distributed,itisn’tlikelythatthestudentswhogotmugsjusthappenedtolikemugsmorethan thestudentswhodidn’tgetmugs.Therefore, it stands to reason that,onaverage, theamount thatstudentswerewilling tosell theirmugsforshouldbeabout thesameas theamount that others were willing to pay for them. The economists’ main finding, however, is that the studentswhohadbeenendowedwithmugsdemandedabouttwiceasmuchmoneytosellthem aspeoplewhodidn’townamugwerewillingtopay.Traditionaleconomistsdon’taccountfor this phenomenon in their models since they assume that people have only one objective valuationofanitemthatisrelevantinbothabuyingandasellingcontext. Theendowmenteffectcanleadtoirrationalbehavior,suchaswhenHomerfranticallyran downthestreettocatchtheGoodwilltruckafterMargedonatedsomeolditemsfromtheattic, including, most important of course, the family’s spare Christmas tree stand.26 It’s pretty unlikelythatHomerwouldhaveexpendedthesamelevelofefforttoobtainaspareChristmas Homer Economicus : The Simpsons and Economics, edited by Joshua Hall, Stanford University Press, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/sfu-ebooks/detail.action?docID=1659899. Created from sfu-ebooks on 2022-09-30 20:51:16. C op yr ig ht © 2 01 4. S ta nf or d U ni ve rs ity P re ss . A ll rig ht s re se rv ed . treestand thathedidn’talreadyown.Similarly,whenMilhousebuysBart’ssoul for$5and Bartdecidesthathewantsitback,Milhousedecidesthathissellingpriceis$50.27Granted, part of the price increase is likely due to the fact that Bart doesn’t have a whole lot of negotiatingpower,but,accordingtobehavioraleconomists,Milhousegenerallywouldn’thave soldBart’ssoulforlessthanabout$10. Inthesescenarios, theirrationalityexhibitedappears tobecounterproductivetoeconomic andsocietalfunctioning,butlossaversionandtheendowmenteffectthatitcreatescanhavean upsideinsomecases.In“AndMaggieMakesThree,”forexample,Homerisnottookeenon the idea of another child, but, fortunately, he is clearly pleased to have Maggie once she arrives. BoundedRationalityandtheProblemofOverchoice Ifeconomicactorswereabletoperfectlyprocessalloftherelevantinformationaboutallof thechoicesavailabletothem,itwouldbeprettyclearthatmorechoiceisalwaysbetter.After all,nooneisforcedtochoosethattwohundredthvarietyoftoothpastejustbecauseit’sthere, so itspresencecan’tmakeaperfectly rational individualworseoff,and itmightevenmake himbetteroff ifhedecidesthat thenewvarietyis thebest toothpasteforhim.Unfortunately, peopleexhibitwhatbehavioraleconomistscall“boundedrationality,”whichisatactfulway ofsaying thatpeoplearestupidor,at thevery least,unable toprocessunlimitedamountsof product information in order tomake perfectly optimal choices. Furthermore, evaluating the multitude of goods and services available for consumption takes effort, and therefore a plethoraofchoicescanbemorefrustratingthanhelpful. Thisnotionof“overchoice”isoneofthecentralthemesofBarrySchwartz’sTheParadox ofChoice,andSchwartzevengoessofarastoshowthathavingtoomanychoicesavailable can cause people to refrain from making a choice at all.28 As an example, he cites an experimentbySheenaIyengarandMarkLepperinwhichsubjectsatafoodstorewereoffered theoption to sampleandbuyaparticular typeof jam.29 In one condition, the subjectswere offeredsixdifferent flavors tosample,whereassubjects in theotherconditionwereoffered twenty-fourflavors.Theresearchersfoundthat,contrarytowhat traditionaleconomictheory predicts,subjectswhowerepresentedwithfeweroptionsactuallywentontopurchasemore jam.Therationaleisthat,aschoicesgethardertoanalyzeexhaustively,thechanceofmakinga suboptimalchoicegoesup,andthefearofmakingasuboptimalchoicecausespeopletoavoid makingachoiceatall. In “It’s aMad,Mad,Mad,MadMarge,” for example,Beckywas trying to killMarge in order to steal her family, but she got derailed by the six different shovel options at the hardwarestoreandjustdecidedtogiveuponhermurderplaninstead.This“choosingtonot choose” is usually counterproductive, but at least Marge benefited from Becky’s choice paralysisinthiscase.Ontheotherhand,overchoicewasnotsogoodtoMilhousewhenhewas confrontedwithmultipleflavorsofJell-Otochoosefromintheschoolcafeteriaandendedup not only with no Jell-O (because the lunch lady told him to scram after fifteen minutes of deliberating) but also with a suspicion that the yellow Jell-O was his pet canary.30 The overchoiceproblemcausesMilhousetogowithoutdessert,thoughinthiscasethedecisionto Homer Economicus : The Simpsons and Economics, edited by Joshua Hall, Stanford University Press, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/sfu-ebooks/detail.action?docID=1659899. Created from sfu-ebooks on 2022-09-30 20:51:16. C op yr ig ht © 2 01 4. S ta nf or d U ni ve rs ity P re ss . A ll rig ht s re se rv ed . abstainfromchoosingwasmadeforhim.Theguywhogotcrushedundertheedgeofthedome inTheSimpsonsMoviebecausehecouldn’tdecidewhetherhewantedtobeinsideoroutside canprobablyrelate. Evenwhentheywanttomakechoices,peoplesometimesfinditdifficulttomakethe“right” choicesduetolimitedcognitiveresources.BabaShivandAlexanderFedorikhinexaminedthis phenomenon via an experiment involving numbers, fruit salad, and chocolate cake.31 In the experiment,onegroupofparticipantswasgivenatwo-digitnumbertoremember,andasecond groupwasgivenaseven-digitnumbertomemorize.Theparticipantswerethenofferedamid- experimentsnack,buttheywerenotcluedintothefactthatthechoiceofsnackwasthereal experiment.Whattheresearchersfoundwasthat,whenthesubjectsweregiventheeasiertask, moreof themchosethefruitsalad,whichcanbeconstruedastheoptionthat ismoreinline with their long-term best interests (or at least in line with a rational, cognitively