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Be Careful How You Interpret Data, Freakonomics Co-author Says
We can learn a lot from economic experiments, Stephen Dubner said today, but their parameters can have a big difference on their outcomes – and what they tell us about human behavior.
Stephen Dubner, journalist and best-selling co-author of Freakonomics and SuperFreakonomics told a full house at the Credit Suisse Asian Investment Conference today that the gap between declared and revealed preferences are very important to understanding human behavior. This gap was identified in an economic behavior experiment called “the Dictator”, which was conducted about half a century ago.
This experiment was based on a professor offering a participant US$10 and 10 more single dollar bills for showing up in response to an advertisement. They were then told that someone in the next room who had also shown up was getting no money, but that the subject could give some of their money to the other person anonymously.
On average, people gave this unknown person US$4 and this amount was generally true no matter what the demographic background of the subject was. Based on this and similar studies, it became conventional wisdom that humans are altruistic, Mr. Dubner said.
But then John List, an economics professor at the University of Chicago, tweaked the study slightly. Instead of only offering the option of giving away the US$10, he allowed participants to not only give money but also to take money from the unknown other subject. This subtle change in the parameters of the experiment dramatically changed the giving nature of the participants – the majority started taking money from the other person.
This “turned a band of altruists into a gang of thieves” according to Mr. Dubner. Based on List’s studies, Dubner believes that humans are relatively altruistic, but perhaps just “don’t want to look like a cheap person in front of the scientist” in the original experiments. No matter the cause, these were the same people acting on different incentives, changing the outcome and conventional wisdom at the same time.
Mr. Dubner’s core message is that everyone should take studies they read about with “a huge grain of salt.” Not doing so would risk underestimating the gap between revealed and perceived preferences and could lead to false assumptions – a critical point for investors making decisions based on research about human behavior. At the end of the 2010 AIC, Mr. Dubner challenged attendees to act not on what people say, but to measure what people do.
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