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.
in my twitter exchange with Jo I cited Ken Binmore who makes distinction between intrinsic and instrumental preferences. So if you have an intrinsic preference for relative status, whether that implies deriving utility from (the instrument of) owning a BMW or a Toyota Prius is socially determined. So textbook econ does say preferences over all sorts of things are socially determined.
Posted by: Luis Enrique | November 02, 2016 at 01:13 PM
So are things like industriousness and scientific curiosity artifacts of some cultures explaining why only some parts of the world thrive?
Posted by: Patrick Kirk | November 02, 2016 at 01:44 PM
you ask about mechanisms: you could argue there is an evolutionary advantage to caring about relative status, so that we strive to improve our performance in some sense, but perhaps there is something else at work: there could also an advantage to calibrating our preferences so that they are realistic, or reasonable, given our situation. And to do that, you have to learn from others. Should I feel pleased with how my life has turned out? Even if I do not directly care about being considerably richer than you
https://www.youtube.com/watch?v=JNa-KLhUfU4
I still need to benchmark my satisfaction against something. Caring about relative consumption is often cast in a very negative light but I think in some very fundamental ways we need to make relative judgments.
I have a 45 min commute to work, how I feel about that must be informed to a degree by whether 45 mins is actually quite good going, given current level of transport technology and geography of house prices etc.
If you think about exerting effort to either change things you get dis-utility from or attain things you get utility from, if your preferences are way out of whack with what's reasonable or typical or feasible, that's a recipe unhappiness and inefficient effort.
If I experience extreme dis-utility from 45 minute commute and actually 5 minute commutes a perfectly feasible (most people have short commutes) then with some small effort I can make myself happier, whereas if 45m already on the short side, I might have to exert huge efforts and sacrifice a lot else to shave 10 mins off.
I guess this is just the familiar idea of adaptive preferences. But if you really think about starting with some exogenous random draw of preferences from the set of all possible preference, you could find yourself miles away from ever being remotely satisfied with your life, so *of course* you need to acquire preferences that are calibrated to the situation you find yourself in, and, I think, that implies you preferences must be learnt from others. Now I write it, it's all rather obvious, but rather than hit delete I will hit post.
(also, if conventional welfare economics is that people are the best judge of their own interests, I think it take a lot more than people being susceptible advertising etc. before that is thrown into doubt. I think it's more like asserting that conventional welfare is economics is only 90% right as opposed to 100% right. )
Posted by: Luis Enrique | November 02, 2016 at 01:58 PM
My comment that preferences are *mostly* socially determined was too strong. I think 'preferences are socially determined to a greater extent than usually acknowledged by economists' is a better statement.
Regarding the comment above on instrumental versus intrinsic preferences, I'm not convinced this saves the textbook model. Is a 'preference' for social status really intrinsic rather than learned or socially conditioned?
It's also telling that Binmore's example isn't about cars and social status - it's about a 'girl' called Pandora who chooses to wear a short skirt (an instrumental preference) in order to attract boys (her intrinsic preference). This seems both sexist and very thin on sociological content.
Posted by: Jo Michell | November 02, 2016 at 02:08 PM
Jo,
it's an obnoxious choice of example, other than Ken's character, I am not sure what it is telling about.
I don't think there's a sharp dividing line between intrinsic and learnt, and in any given model there is a decision about what to take as immutable and what not, but if you look across all societies and all of history, how many of them exhibit concern with status? I am guessing a lot.
Posted by: Luis Enrique | November 02, 2016 at 02:17 PM
further - the textbook model is saved, or not, to the extent it makes sense in context to model preferences as exogenous. It's easy to slip into talking about what economists believe or think, when really you are talking about the choices they make in models not what they actually believe about the world. Economists are quite a strange bunch, but most of them are aware of advertising, for example.
Posted by: Luis Enrique | November 02, 2016 at 02:26 PM
"the textbook model is saved, or not, to the extent it makes sense in context to model preferences as exogenous."
Note that an intrinsic preference for social status does not save the textbook model by making it make sense to model preferences as exogenous, since the textbook modeling requires preferences among choices in economic transactions to be exogenous, and an exogenous preference for social status driving choices in economic transactions leaves choices in economic transactions endogenous to evolving determinants of social status.
Posted by: BruceMcF | November 06, 2016 at 10:55 AM