Predictably Irrational
Posted on November 2, 2017
When it comes to the artful science of economics, most American farmers and ranchers are classic Ricardians, or followers of David Ricardo, an 18th century English stock trader whose influential book, On the Principles of Political Economy and Taxation, explained what he saw as the market’s guiding lights.
Any ag econ student from the last 150 years can spot a Ricardian principle a mile away. Some of his classics include comparative advantage, the law of diminishing returns, opportunity cost, and the ever-useful “theory of economic rent.”
All, not coincidentally, fit snugly into most U.S. farmers and ranchers’ near-sacred belief that, given free markets and free trade, they’ll out produce everyone else.
Maybe, but production doesn’t mean profit and free trade and free markets are ideals, not realities. In fact, there are huge barriers to both: over-the-moon land prices, soaring seed costs, market bubbles, currency manipulation, price inelasticities, monopolies, monopsonies, tariffs, weather, sanitary barriers, ongoing global conflicts …
Moreover, any of these external influences can lead to negative market consequences like market losses and even bankruptcy. That’s one reason why Ricardo’s economic principles are labeled “theories,” not “truths” or “facts.”
An even better reason, explains Richard Thaler, a non-Ricardian economist at the University of Chicago, is that humans are not always rational so, often, the markets they live and operate in won’t always be rational either.
That makes sense. Why else would hardware stores put the cherry licorice display next to the checkout lane if they didn’t want me to make a completely irrational purchase? Does anyone ever need two pounds of chewy, artificially flavored fructose?
Irrational behavior, in fact, explains so many market consequences that the Nobel committee just awarded Thaler its 2017 Memorial Prize in Economics. In announcing the award, the committee not only honored his work on how people are economically irrational, but how “they are predictably irrational—that they consistently behave in ways that defy economic theory.”
Predictably irrational?
For example, Thaler explained to the New York Times, the theory of supply and demand clearly states that people will pay more for an umbrella during a rainstorm. In real life, however, many people will become angry if you charge more for one during a rainstorm. Most, in fact, won’t buy it.
That’s predictably irrational: you really need an umbrella because it’s raining but refuse to buy one because, well, it’s raining.
We down-to-earth farm and ranch folks are predictably irrational, too. How else can you explain why some of us only buy green machinery and others only red?
Right, sure: it’s complicated. And predictably irrational.
If that’s complicated, how do predictably irrational people around the world design and implement farm and food policies that are effective both nationally and internationally?
Thaler, the newly minted Nobel laureate, might call on his fictional friend, Homo Economicas, to tackle that knotty problem. Econ, as Thaler calls him, is part of a group of “highly intelligent beings that are capable of making the most complex of calculations but are totally lacking in emotions…”
In other words, Econ is always predictable and perfectly rational.
On one occasion, Thaler put Econ to work in his classroom after a group of high-achieving students averaged 70 points on an exam. When their bitter complaints over the test scores finally ebbed, Thaler assured the students that, on his grading curve, 70 still equaled a “B.” That meant nothing to the students; all they saw was “70.”
Econ’s solution was beautiful: Thaler raised the value of the next exam from 100 points to 137 points. As a result, the average score on this second exam hovered near 100, not 70. The relative letter grade, however, still was a “B.” The students didn’t care; they saw 100, not 70, and were elated. Predictably irrational? In spades.
How would Econ score the 2018 Farm Bill?
I don’t know but on his principle alone, Ricardo would give it a 100.
© 2017 ag comm
When I first read the article my eyes saw “nationally and internationally” “rationally and irrationally”. After thinking about this I thought that to be successful in reaching people with predisposed irrational thoughts one should address them pre-emptively. For example I can see that all your farm equipment is red but… or I gather you have felt Republicans best represent you in … but why? Talk about it with me. Then what about these latest farm bills? Ease in to the discussions