Why do we insist on making decisions that only take short term consequences into account? Economist David Laibson thinks he has the answer.
Last year, David Laibson bought annual membership at his local gym. The membership cost him $1000. Over the course of the year, he went 6 times.
Laibson is an Economics Professor at Harvard, so he’s quite capable of working out that his 2006 gym visit cost him a bit over $160 each. It was, he admits, a supremely irrational act.
It is also the kind of mistake we make all the time. Today, I’ve eaten two donuts and a big slice of carrot cake; not exactly the most forward-looking of diets. Meanwhile, the global economy is on the edge of collapse, all because a bunch of hubristic bankers – supposedly among humanity’s more rational brains – can’t see beyond the reach of their own noses. For supposedly sophisticated creatures, our horizons are impossibly short. We are little better than a bunch of Homers.
In this week’s Lionel Robbins Memorial lectures at the LSE, Laibson offered a brilliant exposition of this phenomenon: what he called “discounting”. His talk combined classical economics, detailed field work, and – fascinatingly – aspects of cognitive neuroscience.
One of Laibson’s best experiments describes the impact of “cognitive overload” on decision-making. His team got a group of Harvard students to remember a seven digit number, then asked them whether they wanted a piece of chocolate cake, or a piece of fruit. When they were straining to keep hold of the number, the students overwhelmingly chose the piece of cake. When they only had to remember a two digit number, more of them plumped for the fruit.
This was not a test of taste – it was a taste of brain power. Seven digit numbers fall right at the edge of our cognitive abilities – hence telephone numbers. When the students had to remember a long number, it occupied the rational side of their brain, leaving the emotional side to make the decisions. And between cake and fruit, the emotional brain was only ever going to make one choice…
For all the sketchiness of the science, a conclusion emerges with surprising clarity. Rash short term decisions are made with the emotional part of the brain – the mesolimbic dopamine systems – which humans share with all animals. Thoughtful, forward-looking decisions are made with the fronto-parietal systems – the floppy upper part that makes us human.
Our brains evolved at a time when our horizons were short. Now, faced with the prospect of longer and longer lives, and our ability to influence events and environments far into the distant future, they find it impossible to cope.
The only thing to do: construct systems that cater for our imperfection (pdf). More on this, coming soon