The Mostest Hardest Choice

Derek Thompson interviews Daniel McFadden on his recent paper, which argues against modeling consumers as rational agents. This question caught my eye:

DT: One of the observations that most struck me was “economic choices can make us uncomfortable.” That seems like a very powerful idea. How might I see it in my life?

DM: If two “rational” people meet and disagree on the probability of an event (e.g., the AFC team wins the super bowl, the price of Google stock goes up), then both can gain by wagering on the event. In the real world, however, wagering is the exception, not the rule. On the one hand, you could say that getting someone to bet on an event, pay attention to the outcome, and finally make the payoff, is too much work. But actually, if you ask people why they don’t bet often with their friends, they will simply say that it would make them uncomfortable to do so.

This is a hugely important point, and one that has been hard for me to explain to other economists with them walking away understanding. Notice the setup here; placing a monetary bet on an outcome among friends.

Money is the key thing in this situation, and specifically, legal tender. The money system we use (and that is used the world over) has specific mechanics that incentivize particular behaviors and are associated with particular feeling sets. It is not “economic choices” that make us uncomfortable. We make economic choices all the time. It is co-mingling of two different operational value systems that makes us uncomfortable.

Money is not neutral. Now, I am not talking about the ability of monetary policy to affect “real” variables in the long run (per se, although it does in interesting ways), I am saying that money is a value laden mechanism that we use to interact with society. It is a veil. The money we use makes us feel a certain way about certain relationships because our money features mechanics that coordinate certain expectations. Two examples:

1. You wake up, and feel especially lazy on a Sunday, so you mozy your way down to the local IHOP, where you order a breakfast from strangers, whom you may have never interacted with, you never meet the cook, and when the meal is done, you get a bill for $10. You pay it, and you are on your way back home to lounge on the couch.
2. You wake up, and are feeling especially lazy on a Sunday, so you mozy your way down to the kitchen. You find your significant other cooking a nice breakfast. You let her know you’d like a couple eggs and some bacon. She says, “Sure, 10 bucks.”

Which part does not belong?

It is no coincidence that much of economics breaks down at the family level. Introducing money — legal tender, specifically — into relationships that are fundamentally cooperative, trust-based relationships changes dynamics at a fundamental level. Think about your mom taking off work and caring for you when you had the flu as a kid, and then asking you for $300. At that point, would any “normal” person view that relationship as familial? Someone viewing the interaction without pretext could be forgiven for wondering why you were in such a small hospital…

…ahh, hospitals. Health! Something much too important to leave to the vagaries of profit and loss.* If you doubt my premise here, witness the vast Rube Goldberg apparatus we as a society have constructed to distance the money aspect health care from patients, and the public indignation at the notion of health care bankruptcies.

Money is a miraculous tool. It facilitates all of the wonders of modernity that we may or may not take for granted. The invention of money literally created the *(largely) anonymous transaction. But unfortunately the economics profession has simply ignored the fact that the mechanics of the money we use shape our relationships with the world around us.

People are uncomfortable bringing (legal tender) money into their cooperative relationships not because they are displaying irrational behavior, but because it is a tool that has no place in that particular sphere. Like bringing a chain saw to a brain surgery.

*I do not endorse this statement.