This morning, Jo Michell tweeted:
Preferences are mostly socially determined. i.e. the opposite of what the textbooks say.
In a general sense this is trivially true. No middle-aged Victorian gentleman wanted a Martin guitar or Brennan B2 as one of their 21st century counterparts does.
However, we have lots of finer-grained evidence on this point.
Some of it comes from investment decisions. Common sense, and standard financial advice, says that these should depend upon individuals’ taste for risk. But there’s more to it than this.
Some experiments by Matteo Ploner and colleagues established this*. They offered subjects choices among bets, and found that when the subjects were told what the average choice of others was, they moved towards that choice.
This experiment has external validity. Hans Hvide and Per Ostberg show that people own similar shares to their colleagues, and when they change job, they buy shares similar to those owned by new colleagues. This isn’t because their colleagues know something they don’t: such shares do not out-perform. Other research suggests that herding is more common with investors who have suffered recent losses, suggesting that doubts about one’s own competence lead people to follow the crowd. In a similar vein, Ben Jacobsen and colleagues show that peer effects are a bigger influence upon asset allocation decisions than individuals’ personal circumstances.
We also have evidence that consumption decisions are partly socially determined. US research suggests there is a “keeping up with the Jones” motive. And some nice Dutch research shows that when someone wins a car in a lottery, his neighbours are disproportionately likely to buy new cars for themselves.
We have plenty more evidence. Experiments suggest that the choice of how hard to work is influenced by peers. So too are decisions about one’s health – people are more likely to be obese if friends and neighbours are. And so too are educational choices such as what (pdf), where (pdf) and how much (pdf) to study.
What are the mechanisms here? One possibility is that people just want to fit in. Another is that our perceptions of what’s true are shaped by others. The latter, however, can badly mislead us: Solomon Asch’s study found that people’s decisions about a trivially obvious question – the length of different lines – can be influenced by others. This paper (pdf) suggests that both mechanisms can be important.
In saying all this, I don’t intend to say that our preferences are wholly or even, as Jo claims, “mostly” socially determined: in Asch’s experiments, only a minority of subjects either always or never conformed.
Nevertheless, the evidence is sufficient to suggest that people’s choices might not reflect their best interests. And this brings into doubt not just conventional welfare economics but also some justifications for democracy.
* I know some of you have doubts about the relevance and replicability of experiments. But in this context they have a great virtue, of allowing us to overcome the problem that people acting similarly might be due to a “like attracts like” effect rather than a pure peer effect.