One of the most interesting survey articles I’ve seen in a long time came out in the recent Journal of Economic Literature, although apparently it’s been kicking around for a couple of years. It is by Colin Camerer, George Loewenstein, and Drazen Prelec on the topic of Neuroeconomics. Excerpts cannot do it justice, but here is one.
Consumers appear to oversubscribe to flat-rate payment plans, for utilities and telephone service and health clubs…A flat-rate plan eliminates marginal costs, and allows consumers to enjoy the service without thinking about the marginal cost. Similarly, travel plans are often sold as packages, making it impossible to compute the cost of the individual components (hotel, food, transportation). Often components of the package are presented as ‘free’ (like Microsoft’s internet browser) even though the claim is meaningless from an economic standpoint, given that the package is presented on a take-it-or-leave-it basis. One can interpret the appeal of ad-hoc currencies, such as frequent-flyer miles, chips in casinos, or the beads used for incidental expenses at all-inclusive resorts like Club Med, as an attempt to reduce the pain of payment. The ad-hoc currency, whether miles or beads, feels like ‘play money,’ and spending it does not seem to exact the same psychic cost.
In experiments, we have observed a preference for prepayment for certain items, even where prepayment is financially irrational…
Perhaps somewhere among these findings is an explanation for some of our mental illness regarding health insurance.