Don't assume that irrationality is hard-wired into humans

I don’t doubt that there are some types of human behavior that are both hard-wired and irrational. But it’s very dangerous to simply assume that any form of irrationality that you encounter is innate (i.e. genetic). Here’s the NYT:

“A good rule of thumb is we shouldn’t impose a set of rules that will create moral outrage, even if that moral outrage seems stupid to economists,” Mr. Thaler said. . . .

What the successful examples of variable pricing have in common is that they treat customers’ desire for fairness not as some irrational rejection of economic logic to be scoffed at, but something fundamental, hard-wired into their view of the world. It is a reality that has to be respected and understood, whether you’re setting the price for a highway toll, a kilowatt of power on a hot day, or a generator after a hurricane.

“If you treat people in a way they think is unfair, then it will come back and bite you,” Mr. Thaler said. And it doesn’t take a Nobel to understand that.

Interestingly, the same article provides evidence that this aversion to surge pricing (aka “price gouging”) is not hard-wired:

When Stockholm experimented with a charge to enter the city center in 2006, it was highly controversial, with people in suburban towns especially viewing it as an unfair tax.

But since being made permanent in 2007, opinion has shifted, said Maria Borjesson, a transportation economist at the KTH Royal Institute of Technology.

“I think an important lesson is that the conception of what is fair changes,” she said. “Before the charge, the discussion was of how unfair it was and how it would be hardest for low-income people. Now when we do surveys, we find that people think it is unfair if the people who use the streets and pollute and increase congestion don’t pay. We’ve seen this everywhere that has implemented congestion charges, that public support increases afterward.”

I could provide many examples of where the public has gradually become more accepting of surge pricing. Unlike when I was young, airlines now change much higher prices during busy periods. Movie theaters charge more during the evening. Hotels use surge pricing, as does Uber. Gas stations charge more after a severe hurricane hits the Gulf Coast. Groceries use surge pricing for fresh fruits.

Often our moral intuitions change over time. Life insurance was once viewed as a repulsive idea—betting on death—now it’s a well established industry.

When the public holds irrational views that cause real harm to people, say on price gouging or rent controls or kidney markets or drug legalization or gay marriage, the solution is not to throw up our hands and assume that these views are hard-wired, rather we need to look for creative ways to nudge people into more sensible views of the world. That doesn’t mean businesses can simply ignore these irrational views, but on the other hand don’t treat them with undo respect.

Surge pricing can be phased in gradually, so that people become accustomed to the idea that a higher price for electricity on a hot day is just as sensible as a higher price for a hotel room on a holiday weekend.

My criticism of the NYT article is that it doesn’t have enough focus on education. It shows much more respect for irrational views of surge pricing than it would to irrational views on race, gender or sexual preference. And yet irrational views on surge pricing do real harm to people.

Surge pricing in Singapore: