Contrary to what you’ve often heard, psychology is a great discipline that bristles with insight. Case-in-point: Johnson, Zhang, and Keil’s new working paper, “Win-Win Denial: The Psychological Underpinnings of Zero-Sum Thinking.” Quick version:
A core proposition in economics is that voluntary exchanges benefit both parties. We show that people often deny the mutually beneficial nature of exchange, instead espousing the belief that one or both parties fail to benefit from the exchange. Across 4 studies… participants read about simple exchanges of goods and services, judging whether each party to the transaction was better off or worse off afterwards. These studies revealed that win–win denial is pervasive, with buyers consistently seen as less likely to benefit from transactions than sellers.
Let’s look under the hood of JZK’s Study #1.
Our first study tested win–win denial for various goods and services. We asked participants to read about simple, everyday transactions, including monetary purchases of goods (e.g., olive oil, a car), monetary purchases of services (e.g., a haircut, a plumber), and barters of goods (e.g., a McDonald’s sandwich for a Burger King sandwich, or soy sauce for vinegar). Participants then rated the welfare of the buyer and seller (or traders, in the case of barter), relative to before the transaction. This experiment probes two sets of questions. First, how often do people deny that transactions are win–win? If people understand the underlying principles of economics, they should indicate that both buyer and seller are better off after most or all transactions, because the transactions are voluntary. On the other hand, if people deny the win–win nature of trade, then they may often believe that either the buyer or seller failed to be bettered by the transaction, or even was worse off after the transaction.
Second, what pattern of perceived gains and losses do people perceive?…
The set-up:
Participants read about a series of 12 transactions, and were instructed that “for each transaction, you will be asked whether each participant is better off, worse off, or the same, relative to how they were before the transaction.” The transactions were divided into three types—monetary purchases of goods, monetary purchases of services, and barters of goods. Four items of each type were used, and the 12 items were presented in a random order. For the monetary purchases of goods, participants read about transactions, such as “Sally goes to Tony’s clothing store. She pays Tony $30 for a shirt.” Other items included purchases of olive oil, a car, and a chocolate bar. Participants were then asked to rate the welfare-change of the buyer and seller—that is, how each party’s welfare compares after versus before the transaction (e.g., “How well off do you think Sally now is?” and “How well off do you think Tony now is?”) on a scale anchored at –5 (“Worse than before”), 0 (“Same as before”), and 5 (“Better than before”).
Results:
Figure 1 plots the proportion of times that buyers, sellers, and traders were deemed to have gained (the white area), lost (the black area), or experienced neither gain nor loss (the grey area) from each type of transaction. Clearly, people are not neoclassical economists who would color this whole chart white.
How the chart really looked:
Pay attention now:
Whereas basic economics says that both buyers and sellers benefit from transactions, people thought that buyers were much more likely to be made worse-off by their transactions than were sellers. Whereas very few sellers [M = 0.49, SD = 0.86 out of 8] were thought to be made worse-off by the trade, five times that many buyers were [M = 2.53, SD = 2.47; t(85) = 7.55, p < .001, d = 1.11]. [emphasis mine]
Some wise perspective:
Could one argue that these results actually contradict the notion of win–win denial, since a great majority of sellers, modest majority of buyers, and nearly half of traders were seen as benefitting from the transaction? We think this is a tough case to make, because chance responding is not a relevant comparison: The normative theory says that all (or nearly all) of the transactions should be seen as mutually beneficial, thus that is the most appropriate comparison. Empirically, we observe that nowhere near all of the transactions were seen as win–win. By way of analogy, it is a fallacy when people underweight base rates even as they do not fail to consider them entirely (Koehler, 1996), and it is a fallacy when people deny the mutually beneficial nature of trade even as they do not fail to recognize this entirely. These glasses can be plausibly be viewed as half-full (since people often use base rates to some degree and often acknowledge that trades are mutually beneficial) or half-empty (since people systematically underweight base rate information and systematically underappreciate the gains from trade). But these glasses are definitely not full.
Read the whole thing, especially if you teach Intro Econ!
READER COMMENTS
Mark
May 20 2020 at 10:46am
Perhaps this is a specific case of the more general problem where people are bad at understanding that other people have different preferences than they do. Maybe people are thinking “I wouldn’t want a shirt for $30 so someone who buys a shirt for $30 is worse off.” That would explain the buyer/seller difference, as cash is (almost) universally valued, more so than specific products or services.
Mark Z
May 20 2020 at 7:29pm
I was thinking something similar, but I don’t think the cash part explains it. Shouldn’t they just as often observe that the hypothetical buyer is getting a shirt for $30 that the subject would pay $40 for, and think, “what a steal, the seller is getting ripped off.” I think since most people are almost always buyers in the transactions they engage in, maybe they just sympathize more with the buyer. They should do this experiment but specifically recruit a bunch of business owners to participate and see if their responses differ. Maybe a grocery store owner would see his hypothetical counterpart selling fruit way below what they would charge in their own store, and see the owner as getting ripped off, whereas someone who’s always the customer with respect to grocery stores wouldn’t see it this way.
P Burgos
May 22 2020 at 9:50pm
So they should call up the Waltons?
John Alcorn
May 20 2020 at 11:37am
Let’s compare participant judgments in the wild (as distinct from judgments by observers in experiments).
In the wild, do people usually regret their purchases? Do people usually think, “I wouldn’t have paid a penny (dollar, whatever) more for what I purchased”? “I wouldn’t have sold it for a dollar less”? Do people usually feel exploited in arms-length transactions?
I’m almost always happy with my purchases. And I rarely feel like the seller got all the gains from trade. (I admit that my plumber’s rates make we wince.)
My armchair-psychology hunch is that, in the wild, few feel regularly screwed by arms-length transactions, but many feel exploited at work.
Jake
May 20 2020 at 3:21pm
Though I do think that people underestimate the benefits of voluntary exchange (that’s perhaps an understatement), I wonder about the personal benefits of this sort of disposition. That is, it may often be wise to err on the side of distrusting sellers rather than buyers, if only because of the wide and easily verifiable value of money, as opposed the goods and services for which it’s exchanged. Believable counterfeiting is probably less common than buyer’s remorse. In fact, there are entire industries built on mitigating such remorse, selling aggregated information from actual buyers, and records from trustworthy sellers.
In the neoclassical context of the questions, I guess the whole distinction between a buyer and a seller is somewhat arbitrary, since they’re still bartering, though one party’s good – money – happens to be more widely and densely valuable than other goods.
Moe
May 20 2020 at 6:20pm
For a one off purchase from a repeat seller, it is expected that a buyer will be worse off more often than a seller.
Generally repeat sellers have a lot of information on how much better off they will be so will not trade unless they benefit, and sellers should have far less variance in their benefit (especially as they are receiving money). Repeat sellers to one-off buyers also have asymmetric advantages in marketing and persuasion as they know the common weaknesses of buyers.
Buyers will have a much wider variance in their benefits, especially for their first purchase (or uncommon purchases like expensive items). If the benefits of the purchase are prestige, happiness, respect, protection etcetera then the variance will be great and difficult to judge (always before the transaction, and often after too).
So there is an asymmetry for many transactions of the expected amount required for a buyer or seller to “win”. A first-time/irregular buyer often needs to expect a bigger reward to cover the risk of losses compared to a seller. With a large variance in expected reward, a buyer will often still be a loser.
Maybe not entirely relevant to the discussion, but the idea seemed interesting to me.
Eric
May 21 2020 at 4:14am
All this shows is that sometimes people make decisions which are bad for them.
If I spend my money on drugs, that is bad for me, even though at the moment of purchase it’s what I want. Similarly if I spend my money on an expensive luxury item, which won’t actually give me the pleasure I expect from it, that’s bad for me. Of course it’s hard to decide exactly which purchases are bad in this way, but clearly many purchases are.
The seller of the luxury item really did make a good deal – they worked and got a reward for it.
Willow
May 21 2020 at 5:08am
I think the simplest interpretation of these results is that we often think others make lots of purchasing mistakes; that customers are shortsighted and don’t know what is the right thing to do. A parallel in the political world is thinking that the other side is mistaken, and is actually voting against their own best interests.
john hare
May 21 2020 at 6:53am
What I fail to understand is why anyone in a voluntary transaction would accept a deal that made them worse off. Voluntary meaning (to me at least) that you have the freedom to walk away from anything detrimental.
The regrets I am familiar with are mostly with better information later that wasn’t available during that transaction. “That $30.00 shirt you would have paid $40.00 for if necessary, yeah the same shirt is $15.00 at the Dollar Store.” “That job you did for $100.00, yeah everybody else is charging $200.00.”
Only after the fact information makes a deal bad. Or changing circumstances. Excepting of course when one party is dishonest. Like a high dollar name brand tag on a seconds shirt from the bargain brand. Or a work contract with unfortunate hidden clauses.
Francisco Garrido
May 21 2020 at 9:42am
I wonder if the asymmetry between how often buyers vs. sellers are benefited from a transaction has something to do with the fact that most people experience most transactions from the buyer’s end (I’m guessing people don’t think of themselves as selling their labor). Do people who are often on the seller side view this systematically different?
Todd Ramsey
May 21 2020 at 10:04am
How disheartening.
Unless and until the general public internalizes the idea that trade is mutually beneficial, there will be a political bias against markets.
Changing peoples core emotional beliefs about gains from trade will be difficult or impossible. If so, we’re doomed to a political future where the government is expected to Do Something to correct some perceived wrong.
Jim Ancona
May 21 2020 at 10:50am
Isn’t “How well off do you think Sally now is?” the wrong question? Phrased that way, it invites the survey respondent to substitute their own judgment for Sally’s. Instead, they should have asked something along the lines of “How well off do you think Sally thinks she now is?” That would get at the economic point, which is that voluntary transactions are mutually beneficial from the point-of-view of the participants, not some omniscient third party.
Fred_in_PA
May 21 2020 at 11:55am
Isn’t this just Kahneman & Tversky’s Prospect Theory & Loss Aversion (Ch.26 in Thinking, Fast and Slow)? That losing the money we had hurts worse than the pleasure we expect to get from our new acquisition?
Might it be aggravated by the merchant’s failure to whine about having to give up the goods, since he/she views his goods as intended for sale or exchange (Ch.27 in T, F&S). So the buyer may sense that “It seems to pain me more than it pains him/her.”
Thomas Hutcheson
May 22 2020 at 9:39am
However clever the set up, I think it is hard to distinguish between a) the subject thinks the the sum of the benefits of buyer and seller was zero or less than zero, from b) they think the sum was positive but one party benefited more.
Floccina
May 22 2020 at 3:11pm
Part of it people do not want to admit what great deal most things are because we always want more.
Proverbs 20: 14 “It’s no good, it’s no good!” says the buyer– then goes off and boasts about the purchase.
Matthias Görgens
May 22 2020 at 11:56pm
Here’s a more benign interpretation at least for the monetary transactions:
Perhaps people take opportunity costs into account?
A t-shirt might provide you the equivalent of 50 dollars of utility. But if you can normally buy them at a shop for 25 dollars, then a purchase for 30 dollars would look like a loss of 5 dollars and not a gain of 20 dollars equivalent of utility.
Lots of competition between sellers like that means that the buyer doesn’t get much extra utility out of a transaction with one specific seller. The consumer surplus comes from the existence of the competitive landscape of all the sellers.
This hypothesis fits best for buyer/seller transactions. It’s a bit more far-fetched for barter.
I wonder whether you could suitably reformulate questions to tease out how much of an influence (implicit) opportunity costs considerations have on people’s judgement.
Amy K
Jun 14 2020 at 2:15am
I don’t think this is a cognitive bias, rather, it’s an application of a useful heuristic for interpersonal trades. That heuristic is that “the party with more power can determine the context of transactions towards its benefit”. In the relationship between customer and corporation, the corporation is clearly the party with more power. And it can exploit that power to control the set of available transactions to its benefit.
Consider some extreme examples: the most extreme one would be you and a mugger “voluntarily” trading your wallet for your life, or a scammer selling you fake goods, but you can easily find ones that don’t involve physical violence or fraud, such as the opium trade in China. Certainly the opium trader is providing the addict a useful good, more opium to stave off withdrawal in exchange for their property, and the trade is voluntary, but what does your instinct say about whether or not it makes the buyer better off? Or consider this thought experiment: a company creates a monopoly on food in a region, and then raises prices to the point where people have to sell everything to avoid starving. Everyone benefits from the individual transaction, but on net the buyers are hurt by the existence of the company itself.
The problem might be from the ambiguity of language – the difference between “does the buyer benefit from this transaction” and “is the existence of the company a benefit to the buyer”?
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