The Surprising Deceptions of Individual Choice

What you say you want, what you actually want, and what you get

You ask what music I like and I say that I am into classical music, or something else highbrow. I love it, I insist, and go on and on about composers and concertos. While I drone on, you slide over and open my Spotify account and take a look at the list it has of my most played tracks.

Top: artist Taylor Swift. Played for 847 hours in the last year.

So which kind of music do I like?

My pretentious blathering is my stated or expressed preference. The record of my actual listening behaviour is revealed preference.

Revealed preference has high status in economics. It is used to cut through the noise of what people say they want to get at what they actually want. People may say they would pay more for healthy food options, but every meal they order the cheap burger. They say they want a town centre with indie bookshops, but the indie bookshops go bust as people order directly online. Our real preferences, so the thinking goes, are revealed by our behaviour.

The idea isn’t just powerful in economics, but also in psychology, where the legacy of behaviourism instils in adherents of the discipline the habit to never, please, believe what people say over watching what they do.

There’s some truth in this, but it is not the whole truth. While taking someone’s expressed preference as their real preference is problematic for a whole variety of reasons, it is also not possible to observe their revealed preference and conclude you have hit on a royal road for insights into their desires.

The reason, simply put, is that revealed preference is always mixed up with what is possible in our circumstances. There’s an anecdote about an economist and a friend who walk past a sports car dealership and the friend says “I’d really like one of those cars” and the economist says “No you wouldn’t”. The point being that if the friend really wanted a sports car they’d have bought one. The fact that they haven’t reveals that they don’t want one, not really.

But we all know what the friend meant, that they would like a car if they had the spare cash.

The idea of revealed preference collapses history to present our responses to circumstance as what we really want, closing off consideration of what we might have wanted if things had turned out differently.

In his 2006 book, No One Makes You Shop at Wal-Mart: The Surprising Deceptions of Individual Choice, Tom Slee gives the example of two friends walking in the remote country and one falls down a deep well. Without help they will surely die unnoticed and unrescued. The other friend offers to throw down a rope for $1,000,000.

The friend-in-well must pay, so their preference is revealed - they want to pay an extortionate price for the rescue, right? Yes, in a sense, but really they would rather the rope offer was free, or they’d not fallen in the well. Or they had chosen better friends.

I read Slee’s book when it came out and re-read it recently. It’s a fantastic exploration of the idea that other people’s choices pattern our behaviour. There’s a formal account of coordination problems - game theory - which Slee uses to illustrate different circumstances in which everyone appears to freely choose outcomes which are to their disadvantage; in which their revealed preference is a perversion of what they would like, if circumstances were different.

This is where the Wal-Mart of the title comes in. The idea that what everyone freely chooses must reflect their true desires — what Slee calls Market Think — pushes the idea that collective outcomes, like the small shops all going bust leaving only chains like Wal-Mart, must be what we really want, regardless of our stated preferences. Slee uses the toy models of game theory to show how free choice doesn’t make sense in a world where we have to coordinate with others, and circumstances can conspire (or be engineered) so our best available choice is the worst outcome for us all.

A forceful illustration of this - more subtle than the friend-down-the-well example - is a famous example from economic theory, The Market for Lemons, as retold by Slee (and now, hopefully without losing the essence, by me).

A “lemon” in this story is a used car with some hidden defects. The sort of vehicle that looks fine at first which is going to prove unreliable and need repairs. The other sort of used car is a “peach”. Peach cars look identical to lemon cars, but don’t have any hidden defects. They are reliable. A better buy.

Let’s suppose sellers want as much money as they can get for their cars, with some bottom limit beyond which they won’t sell. Sellers of peaches want at least $14,000 for these cars, while the sellers of lemons want at least $10,000. Let’s also suppose that potential buyers would happily pay up to $14,000 for a peach, or $10,000 for a lemon. Their preference is clearly for a peach - they want it more and will correspondingly pay more for it.

With sellers willing to sell and buyers willing to buy, it looks at first like all the circumstances are there for successful trades.

But there is a problem. Sellers know if they are selling a peach or a lemon. Buyers cannot tell at the point of purchase. How should they respond? Well if they think there is a 50/50 chance of getting a peach or a lemon, they could compromise and offer $12,000, the midpoint between the two prices they’d be willing to pay. The problem is that no seller of a peach wants to accept that price for their car, so they will refuse to sell (‘exit the market’). A potential buyer might know that, and realise that anyone willing to sell a car at $12,000 must know they have a lemon, which means it is worth $10,000, so they should offer a lower price (possibly they immediately offer $10,000).

The original author of this scenario, George Akerlof in 1970, used it to illustrate how information asymmetry can prevent functional markets forming. Because buyers cannot distinguish peaches from lemons until too late, there is no market for peaches. There are buyers who would be happy to pay, and sellers who would be happy to sell, and a mutually acceptable price, but trades cannot happen.

Slee knows all this, but refocusses the scenario. He takes us into the head of a prospective car buyer. She sits at home reasoning about her desires, and the market conditions (lemons and peaches and their prospective sellers). She knows she wants a peach more - $4,000 more - but she also knows that she cannot tell the difference between a peach and a lemon so can’t offer the peach price for what might be a lemon. She also knows that nobody selling a peach would accept a lower offer, which is what she must make. The only car she can reasonably buy at a price which reflects its worth is a lemon. At the end of her cogitations she steps out of her house resolved to do the economically compelled thing: buy the car she doesn’t want.

Slee’s book is a series of worked examples, different economic games, showing how context can make it so our behaviour (revealed preference) is not aligned with our true preferences. Here’s an intemperate review of the book, from pro-market / libertarian economist Alex Tabarrok. The upshot of his criticism, as I see it, is that Slee misses out much of the complexity of economic thought around markets (and the alternatives and constraints which can avoid their downsides). Maybe this is the wrong book for an economist, but it was the right book for me when I read it. It might not tell the whole truth about economic theory, but it tells, forcefully, an important truth about the limits of markets for delivering what people want.

Turning to the psychology of it, if we don’t trust stated preferences, and revealed preferences are hopelessly tied up with contingent facts about our circumstances, is there any way to get at what we really want? One move is to follow economic theory and suppose that true preferences must exist (e.g. in the maximum value the buyer would theoretically pay for a theoretical car) and assume their values in a model.

Another move is to look back at our stated preferences. In isolation, these may be so much hot air, but our expressions, ultimately, are also behaviours and have the potential to feed reasons into the wider system of our beliefs and behaviour (a point made by Johansson et al., 2011).

Ultimately, neither stated nor revealed preference gives an index of someone’s true desires which is simple or transparent. When I look inside myself, even possessing the most perfect information anyone has about my preferences, sometimes I myself don’t know what I want, or what I would want if the world were different.

This seems to put a limit on any reasonable expectations for a theory of preferences. Although it makes the job harder for the psychologists and economists, it at least makes the question of what I really want more interesting for me.

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Below, references, further reading and other things I’ve been thinking about.

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References:

Akerlof, George A. (1970). "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism". Quarterly Journal of Economics. 84 (3). The MIT Press: 488–500. doi:10.2307/1879431.

No One Makes You Shop at Wal-Mart: The Surprising Deceptions of Individual Choice By Tom Slee (2006). Buy in the US from publisher Between The Lines , in the UK I would recommend News From Nowhere.

Johansson, L., Hall, L., & Chater, N. (2011). Preference change through choice. In R. Dolan & T. Sharot (Eds.) (2011). Neuroscience of Preference and Choice. Elsevier Academic Press. pp. 121-141.

Both trivially true and obviously incorrect

There’s a nice note on the Wikipedia for Akerlof’s paper which illustrates something about academic publishing and the scholarly life:

Both the American Economic Review and the Review of Economic Studies rejected the paper for "triviality", while the reviewers for Journal of Political Economy rejected it as incorrect, arguing that, if this paper were correct, then no goods could be traded.[4] Only on the fourth attempt did the paper get published in Quarterly Journal of Economics.[5] Today, the paper is one of the most-cited papers in modern economic theory and most downloaded economic journal paper of all time in RePEC (more than 39,275 citations in academic papers as of February 2022).[6] It has profoundly influenced virtually every field of economics, from industrial organisation and public finance to macroeconomics and contract theory.

I wonder also if this contradiction between being trivially true and also incorrect is something modelling papers are particularly prone too. If you have a model simple enough to be generally applicable, and explain it well enough that it can be easily understood, it will look either trivial, or someone with a different set of abstraction preferences will view it as incorrect (because it omits or contradicts something it was not intended to include or address).

REVIEW: Santiago Amaya’s review of Acting for Reasons by Borg

Borg’s book, we’re told by this review, defends the common sense view that people do things for reasons (and our behaviour is thus responsive to reasons), against the “people are stupid” school of psychology. That’s a phrase I hadn’t heard before, but recognise immediately - the studies of priming, unconscious processing, bias and so on. The whole set of celebrity findings which suggest humans spend their lives as failures or automata. I reject it! And so should you, according to both Borg and her reviewer, Amaya. Amaya, however, says that there is a missed opportunity in the book to do more than just defend the common sense view, but also follow where recent debates in philosophy have tried to provide an account of how we actually do reason. The evidence against reason may be weaker than many suppose, but reason is still more stranger, and more interesting, than the common sense view supposes.

Original book:

Review: Santiago Amaya (forthcoming). Review of Emma Borg. Acting for Reasons. In defence of common-sense psychology. Oxford: Oxford University Press, 2024. ix + Pp. 286 pp. Philosophical Review.

Catch-up

Last time I wrote Hostile interpolation (“rhetorical style in the attention economy. Or, It’s not you, but it’s them”). The title is from a phrase I heard a friend use. A commentator with a better grounding in continental theory suggested that the phrase I heard might have been “hostile interpellation”. This strikes me as extremely likely. I am going to chalk the correction up as a victory for thinking in public. I won’t adjust the post heading. It may be an error, but it is my error, so it will stand (and I still think the post content makes sense regardless of title).

Before that I dished out some Mind Hacks-style Quick facts on speed reading (“Understanding what doesn’t work can help us with what actually does”), and before that reviewed a neat study on why groups can outperform individual reasoning: The wisdom of deliberative crowds (“Pooling answers is good, but collectively agreeing a system is better”).

Back in 2020 I covered the Johansson et al (2011) paper mentioned above in my post Barnacle Geese, Bright Lines and The Regulation of Beliefs (“Reasonable People #7: challenges to the idea of consistency as a general principle, and why other people can be a foundation for a system of reasons.”). Titles were longer back in those days.

This is Reasonable People #100. Neat!

…And finally

Admiral Wonderboat: (on substack)

Comments? Feedback? Lemons? I am tom@idiolect.org.uk and on Mastodon at @tomstafford@mastodon.online

AI declaration: I write all the words and think all the thoughts myself. I ask Gemini to check for spelling and grammar, and today I asked it to check I’d got the details of the Market for Lemons account right (it said I had).