Friday, February 29, 2008

Pool anchors

I just started reading Predictably Irrational, by Dan Ariely, and I'm already impressed. Professor Ariely does behavioral economics research at MIT; he runs experiments to show that we often act irrationally, comes up with a hypothesis that might explain why, and then runs more experiments to test his hypothesis.

For example, he shows that we easily get "anchored" to prices; the amount of money you're willing to pay for something is often not really related to how much value you'll get; instead, you'll probably be willing to pay whatever you paid before.

It's a mental shortcut we all unconsciously make. And establishing the initial anchor price can be surprisingly arbitrary. The book describes an experiment where the anchor prices were strongly influenced merely by asking people to write down the last two digits of their social security number and asking "would you pay that many dollars for this?".

I think we're seeing this anchoring effect in the discussions of the Town budget.

Here's a thought experiment:

Imagine a town about the size of Amherst, in the same sort of budget squeeze. You're in charge of that town's budget, and you're looking at about $600,000 in cuts to make your 60 million-dollar budget balance.

A group of citizens approaches you and asks that you spend a measly $90,000 or so on some very good programs-- a second swimming pool downtown and funding for several local human service agencies.

Would you find a way of cutting another $90,000 from your budget to fund the new programs or not?

I would not. I'd argue that the town survived last year without those things, but that we couldn't afford them in the current budget crunch. I would guess that most people would agree.

What would Town Meeting say if I proposed that we carve another $20,000 out of this year's budget to make a really great ice skating rink in Kendrick Park (with skate rentals and hot chocolate maybe...) next winter?

We're irrationally anchored to the things that we already have, and that makes it really hard to give them up even though there might be other, higher-priority things we could (and should!) invest in. I'll keep reading Predictably Irrational; I'm hoping Professor Ariely will give some strategies for overcoming our irrational tendencies.

3 comments:

LarryK4 said...

Damn, Cherry Hill explained.

Now, about that guy on the Grassy Knoll...

Anonymous said...

I respect this reasoning, but I thnk it may have one lapse in the logic. It doesn't take into account the possibility that by not funding it for this year, you may have to moth-ball it forever. I believe that, because of that ageing steel liner, if you go a year without the costly maintenance, you've made a decision for years to come. I'm not saying I support keeping the second pool, just that there are sometimes unintended consequences. Jeff Blaustein

Gavin Andresen said...

Larry: ayup, Cherry Hill definitely fits.

Jeff: good point, although there's a chapter in Prof. Ariely's book about how people irrationally keep their options open, even when it's detrimental to do so.

Hmm, I think that deserves a full blog post...