Derek Thompson interviews Daniel McFadden. McFadden says,
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.
Thanks to Jason Collins for the pointer.
What accounts for this aversion to wagering? McFadden says that people do not like choices. I do not see how that follows.
I do not like to bet with friends because it can feel like a lose-lose action. I feel bad losing, and I feel bad taking my friend’s money when I win. I stopped playing poker at a very early age, because I realized that for me it was lose-lose in that sense.
Someone like me would be more willing to wager in a blind market, such as the stock market, than to make the same wager against a friend. It is hard to hold all else equal, however. When you wager against a known individual, you have additional information about that individual’s strengths and weaknesses, and that might make you more willing to wager.
In wagers among friends, one is often motivated by bragging rights, ego, and other psychological factors. The monetary stakes are often secondary. The pleasure you get is from “I won a bet against ____,” not “My wealth increased by _____.”
Given all of those considerations, I am not convinced that our propensity to avoid wagering tells us something about an aversion to choices.
The overall interview is about a paper on behavioral economics. Long-time readers will know that I am not a fan of that field. Proponents get excited by “gotchas” that show people making decisions that are arguably not rational. These gotchas strike me as superficial.
I would like to see some deeper philosophical thinking. Do these findings make the doctrine of subjective value untenable? Or should they be viewed instead as casting yet more doubt on the project of assigning objective value? Some researchers think that we should be understood as having multiple selves. What are the implications of that?
Behavioral economics (or psychology & economics, as my professors preferred to call it) strikes me as more epicycles or, to put it another way, a different theory/model for every situation. Accurate, yes. Parsimonious, no. Predictive? Not really.
I think you are entirely right, Dr. Kling, in bringing out the difference between wager-like transactions between friends/acquaintances, and arms-length wager-like transactions.
I would go further and say most people are averse to *any* transaction involving friends and family. But we have no trouble with market transactions with people we are not close to.
Sorry, I forgot to add: recent work by Steven Levitt and John List casts serious doubt on a number of behavioral economic anomalies. Simply put, these biases are found among inexperienced participants, but much less so, if at all, among experienced professionals.
Thus, market discipline rules out most (but perhaps not all) anomalies.
Any article that approvingly sites that stupid paradox-of-choice jam “experiment” immediately gets closed in my browser. Theoretically I would welcome the findings of behavioral economics; actually, though, if that type of stuff is the best they can do, I think I’m better off ignoring it.
So many results along these lines miss the point entirely.
For example, in many debates between friends, the debate itself is irrelevent. It’s a social interaction. It likely has far more to do with affiliation, conversation as entertainment, and so forth, than anything else. The response to almost all bets that arise in such conditions is “who on Earth cares!”
Likewise many other discussions of “rational” this or that which often fail because they define “rational” narrowly. Is it rational to buy certain brands of grocery products over and over? Why do you think I care? It’s a tiny part of my expenses and the time to write this paragraph about it is worth more than any price difference in eggs, toilet paper, or soda. Again, it’s a measure of “irrationality” that completely misses the point.
Here is my comment on said question: http://cheapseatsecon.wordpress.com/2013/01/30/the-mostest-hardest-choice/
The burgeoning Derivatives Market attests to people’s taste for betting, with strangers….