# Test Your Economic Rationality

From a recent Washington Post article:

Recent studies have shown that people don’t tend to be rational economic actors; their decisions are based in part on their reactions to the facts at hand. Here’s a chance to test yourself.

1. Imagine you are sitting on a hot beach. Your companion offers to go get a couple of bottles of cold beer. He asks you:

A. What’s the most you’ll pay if the beer can be bought at a local dive? B. How much if he has to get it at the fancy resort down the street?

When University of Chicago economist Richard Thaler put these questions to two groups several years ago, the average responses were \$1.50 for the beer from the dive and \$2.65 for the one from the hotel. In economic terms, that makes no sense: If you?re willing to pay \$2.65 for a beer, why should you care where it is bought or how much profit the seller makes? But most people do care. They don?t want to be taken advantage of by the dive owners, whose expenses are minimal. But they’re willing to pay more at a resort, where they understand expenses are high.

2. Imagine you are public health director in a poor country where a fatal infectious disease threatens a small village of 600 people. You can inoculate every resident with only one of two vaccines. Which vaccine would you choose?

A. The one that will save 200 lives. B. The one that will result in 400 deaths.

When psychologists Amos Tversky and Daniel Kahneman administered a somewhat more complex version of this test, more than three people chose A for every one who chose B. In fact, the vaccines are exactly equal in their effectiveness, but when facing tough decisions, people feel more comfortable when choices are framed positively (saving lives) rather than negatively (causing deaths).

3. Imagine you are offered a choice of gifts for participating in a survey. Which would you choose?

A. \$85 in cash. B. A gift certificate for an \$80 massage at a local spa.

When Stanford University psychologist Itamar Simonson offered a group of women these choices, a third chose the gift certificate. The rational choice is the cash even for someone who wants the massage. The \$85 would cover it while still offering flexibility. But Simonson reasons that women who wanted the massage didn’t trust themselves to take the cash, knowing that guilt would lead them to spend it on something less indulgent.

4. Imagine you bought a case of fine Bordeaux wine at \$20 a bottle a decade ago. Now the wine sells for \$75 a bottle. What will it cost you to now drink a bottle of wine?

A. \$0 B. \$20
C. \$20 plus 10 years interest D. \$75 E. It’s a savings of \$55

Thaler found more than half of all respondents answered zero or a \$55 saving. Strictly speaking, the right answer is D, reflecting the opportunity cost of not selling the bottle on the open market. Most people however, focus on the amount already shelled out, the sunk cost.

5. Imagine you are given \$10 and told you must offer to split it with a stranger. The only hitch is that if the stranger rejects your offer, neither of you get anything. How much must you offer?

A. \$9 B. \$5 C. \$1 D. Zero

The rational (that is, selfish) strategy would be to offer \$1, which the stranger would be silly to reject. After all, \$1 is better than nothing and \$9 is the best outcome for you. But in countless repetitions, of this ultimatum game, the majority of all offers were between \$3 and \$5, while anything below \$2 was usually rejected by the stranger. The results suggest that people’s desire for money is tempered by notions of fairness.

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