Adjusted for inflation, equity (stocks) have a much higher payoff than bonds. Over a period of 20-30 years, the former will return at about 8% a year; the latter just 1%. One of the possible explanations is loss aversion: people don't like to see value decrease so they gravitate towards bonds, which are always increasing. Shermer uses loss aversion to explain why people tend to choose B:
A is waiting in line at a movie theater. When he gets to the ticket window, he is told that as he is the 100,000th customer of the theater, he has just won $100.Another possible reason is the tendency for people to judge their wealth in relative and not absolute terms. I'd rather be wealthier than the people around me, not even more wealthier if it means others become richer than I. In the land of the blind, the one-eyed man is king. Research suggests a lot of people would rather be king than have depth perception.
B is waiting in line at a different theater. The man in front of him wins $1,000 for being the 1-millionth customer of the theater. Mr. B wins $150.
Amazingly, most people said that they would prefer to be A. In other words, they would rather forgo $50 in order to alleviate the feeling of regret that comes with not winning the thousand bucks. Essentially, they were willing to pay $50 for regret therapy.
The origins of loss aversion and relative wealth probably lie in evolutionary psychology. Economics should be particularly interested in this field; it can explain why people dislike free trade, feel economies are zero-sum, and romanticize the poorer but more familiar past.
HT: Brian Hollar
1 comment:
Don't the expressed preferences seem kind of irrational and nontransitive? If that sort of behavior were common, wouldn't that make a lot of economics just not make a lot of sense?
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