Princeton - Weekly Bulletin 10/21/02 - Experiment shows how consumers make 'myopic' choices

A mug in the hand is worth . . . Experiment shows how consumers make 'myopic' choices

Princeton NJ -- Nobel Prize winner Daniel Kahneman described one of the seminal experiments he conducted to demonstrate that when people make economic decisions, they often do not make the most rational choices. Here are his words from the Oct. 9 news conference:

You come to the classroom with many boxes of attractive university mugs, and you arrange the experiment in the following way: On a completely random basis, half the people get a mug and half don't, and everyone gets a questionnaire.

For the people who got the mug, the questionnaire says: This is your mug. You can go home with it. However, you have an opportunity to exchange it for money, and we'd like you to commit yourself. If we offer you $10, will you exchange it? If we offer you $9.50, etc., all the way down to 50 cents.

For people who didn't get a mug, their instructions say: Look at your neighbor's mug. Now you have a choice. You can either have that mug, or you can have an amount of money. Do you want $10 or the mug? Or $9.50? And so on.

The important thing to notice is that there is no real difference in the situation of these two groups of people. They can both go home either with money or with a mug. And yet you get a very reliable effect. People who have a mug -- I have the numbers, I know them by heart -- demand $7.12 for their mug on average. And the choosers (those who didn't get a mug) thought that the mug was worth about $3.15.

This is a standard result -- it's been replicated many times -- and I think it tells you something very important. It tells you that people are extremely myopic. If they were thinking in the long run, they'd be thinking about having a mug or not having a mug. But they're not thinking that way -- what they're thinking about is when they have a mug, they have to give it up in order to get the money, and they don't like the idea of giving up the mug. When they don't have the mug, it's a matter of choosing between two gifts that they could get, but they don't need the same compensation that the sellers do to give the mug up. So it turns out that people don't think of having the mug or not having the mug -- they think of giving it up or not giving it up.

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