Saturday, February 9, 2013

Anti-Profit Bias

Steve Landsburg posted a curious puzzle a few days ago. A woman's husband seems to be prickly about markups on lamps, refusing to solicit firms that sell newly manufactured fixtures. Landsburg assumed that the husband is a rational person, then offered three possible explanations for the man's reticence to buy new home lighting: misanthropy, long-term thinking, and historical thinking. Being the twinkle-eyed sprite we all love, he figured his readers would easily accept the assumption of rationality.

As they should. People are rational.

Well, meta-rational, anyway. I find it useful to think of rationality as sort of a search process. It's useful to know when to engage the deep-thinking parts of my brain (the slow mind, if you're a big fan of Kahneman and Tversky) and when to rely on heuristic shortcuts. Trouble is, shortcuts can get you lost.

Let me offer a fourth conjecture: this woman's husband carries with him a pernicious anti-profit bias. In what sense might an anti-profit bias be meta-rational? Well, consider my previous post on the Macklemore video. The idea that a firm might plausibly extract rents generated by social, psychological, or cognitive aberrations isn't completely baseless. Investigating the reasoning behind specific pricing decisions can be costly, so perhaps it's not unreasonable to adopt a rule like: "don't buy anything if the markup exceeds 20%".

Is this a good rule? No. Is it a rational rule? Sure, if we consider that rule adoption follows the standard laws of supply and demand. If the woman's husband finds that, on net, he gives up less consumer surplus by being wary of high markups, then the rule is likely to be ecologically rational. Better education in basic economics might help him to adopt more useful shopping heuristics and might be directionally meta-euvoluntary, so it's in his interests and in the interests of euvoluntaryists everywhere to reduce the cost of obtaining excellent economics education.

This is probably a good time to give a plug for Marginal Revolution University. In the unlikely event you've not already heard of it, it's an excellent online resource for economics education.

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Do you have suggestions on where we could find more examples of this phenomenon?