I’m a member of an Internet community that swears by the Libertarian principles. They believe that individuals (can?) make the best choices for themselves. Their economic rationale of freedom of choice is in fact personally satisfying, empowering and democratic. Nine times out of ten I want to believe their argument.
One clear assumption in their thinking is, of course, that individuals should and do make better (if not the best) decisions than those that anyone else can make for them. To quote Richard Thaler,
‘We claim that this assumption is false – indeed obviously false. In fact, we do not think that anyone believes it on reflection*’.
This obviously does not imply that people should not be allowed to make their own independent decisions. Just that they suck at it.
Let’s start with a few examples:
1. An 18 yr old who observes and deduces that cigarette smoking is cool. He decides that cigarettes make up for whatever he lacks in sexiness. (I’m only guessing – who knows what he tells himself when he takes on smoking)
2. A 28 yr old who agrees to marry the girl his parents picked for him. He reasons – ‘What’s the worst that can happen? I’ll at least have two kids and the option of a companion whom I can ignore when required.’ (This I am not guessing)
3. When a 35 yr old chooses a new cell phone, he picks his favourite model and then back-reasons how ‘Apple is so incestuous!’ (Real story, real words of @kunalrao)
People make the best decisions when they have experience, information and the ability to learn quickly from the outcome of their decisions. For example, you are not likely to be the best judge of a suitable life insurance policy for your family for all of the above reasons.
More commonly, people are influenced by proximity to groups or communities that provide implicit information. In a simple experiment, individuals were placed in a dark room where a small pinpoint of light was placed a short distance away. Through perceptual illusion, the dot was made to appear to move. Participants had to estimate what distance the dot had moved.
Individually, participants came up with wildly differing distances. When acting in groups, however, they showed unmistakable conformity. Individual estimates converged and a group consensus quickly developed. The consensus sustained over time and members grew hotly committed to it.
In fact, this group consensus was so deeply internalized that people reported it even when alone – and persisted over ‘generations’ when after a year they participated in new groups whose members had different judgments.
As Thaler points out in Nudge, there is an important clue here on how groups, cities, and even nations can start at the same point and converge on vastly different beliefs – attributable to small initial group or a single person. Oh, and did I mention companies?
That big bad word called ‘company culture’ is sometimes literally built in a day. Yet, it’s not hard to dislodge existing group beliefs and behaviour. Sufficient people moving to a different belief will inevitably move the whole group to a fundamentally different ‘culture’.
But who will move first to follow a different point of view that is economically foolish, and often, self-defeating? There’s a whole body of work in game theory that addresses that question – I will attempt to touch upon it in the next post.