Monday, June 19, 2006

Rational Behavior and Tony Snow

I posted the other day citing Tony Snow as a case in which rational people didn't behave rationally in signing up for a 401K. I got an email (accidentally deleted) suggesting a wider context to his behavior, which is fair. I should have, I guess, admitted that I myself failed to sign up for the government equivalent of a 401K when it was first made available in the mid-80's. Took me about 4 years to do so.

All of which reminds me of a paper on "paternalistic libertarianism" by Cass Sunstein and Richard Thaler, the idea being that society can structure choices in a paternalistic way. For example, in my case if the government had setup the TSP (Thrift Savings Plan = 401K) with all old civil service employees contributing 5 percent of salary as the default position, but with the option to opt out, I would have benefited.

Which leads me to something I saw this morning (via Marginal Revolution) in a discussion of the minimum wage (very against raising it) here, summarizing research in New Jersey that seemed to show that raising the wage might not cause loss of jobs: "“Turnover costs, imperfect information, search frictions, commuting costs, and inertia generate short-run, and possibly long-run, monopsony power for individual firms.” This is not exactly a simple condition, likely to apply uniformly across a huge, diverse country. " To me, "inertia" applies across all human beings I've met. Maybe someone like Bill Gates is relentlessly rational in allocating his time and efforts, but the rest of the species seems to have a little of the couch potato in them, at least metaphorically.

Bottom line--I don't think humans are all that rational, certainly not in maximizing short-term returns. (How much of a pay cut did Tony Snow take to serve his country and a President he admires?)

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