What people really do instead of maximizing utility

A recent research study turned up some delightful results that are both not intuitively obvious to a five-year-old, and absolutely at odds with the predicted rational utility-maximizing behavior of homo economicus.

As reported in the January 14, 2010 edition of The Economist, Tanjim Hossain of the University of Toronto and John List of the University of Chicago “… worked with the managers of a Chinese electronics factory, who were interested in exploring ways to make their employee-bonus scheme more effective ... At the beginning of the week, some groups of workers were told that they would receive a bonus of 80 yuan ($12) at the end of the week if they met a given production target. Other groups were told that they had “provisionally” been awarded the same bonus, also due at the end of the week, but that they would “lose” it if their productivity fell short of the same threshold.

“Objectively these are two ways of describing the same scheme.” But as it turned out, “The fear of loss was a better motivator than the prospect of gain (which worked too, but less well). And the difference persisted over time: the results were not simply a consequence of workers’ misunderstanding of the system.”


Very interesting – and the results cry out for explanation, since classic economic theory would predict that the two schemes would produce the same results, and “positive organization” theorists would expect the reward to work better than the punishment. The researchers see this as essentially a “simple framing manipulation” using a notion from behavioral economics: “the value people attach to objects is affected by what they already have, and people abhor losses more than they like equivalent gains.” In other words, as The Economist opined: “Economists have always been advocates of using carrots and sticks. But they may not have emphasized appearances enough. Carrots, this research suggests, may work better if they can somehow be made to look like sticks.”

Well, no. I respectfully suggest that this is a great deal more than “appearances.” The fatal flaw of homo economicus stands out in high relief in that casual phrase “equivalent gains.” In Descriptive Psychology terms, this is classic Critic language. What is at issue here is understanding that behavior is engaged in by the Actor, not the Observer/Critic, and that what is “equivalent” to the Critic can be, and in this case is, categorically different to the Actor.

Here’s an alternative homo communitatus explanation: People act on what is real for them. They also act on what is possible for them, but “real” vs. “possible” is an important and categorical distinction for an Actor. When a worker is given a bonus, even “provisionally”, that money becomes his – real money, a part of his real world – and he will treat it accordingly, including acting to prevent its loss. A bonus promised for performance at the end of the week is possible money.

To state explicitly the relevant homo communitatus principle: A person will value a real something over the “same” possible something.

Loss is not stronger than gain; real is more valuable than possible. And this is not a matter of “framing” or “appearances”; it is a matter of recognizing that Actor’s knowledge is not equivalent to Critic’s knowledge, which has been the fatal blind spot of classic economics all along.

There are a number of interesting corollaries of this principle, and a few other basic principles related to homo communitatus; we can explore these in future dialogue. For now, see my comment to Joe’s post below on “Behahavioral Health Economics?” for another example of how this principle makes a difference.

(The crucial AOC concept and Actor’s knowledge are covered in depth in “At a Glance and Out of Nowhere” in the DPI papers, and, canonically, in Ossorio’s The Behavior of Persons. The full report of the research study can be found at: Tanjim Hossain & John A. List, 2009. "The Behavioralist Visits the Factory: Increasing Productivity Using Simple Framing Manipulations," NBER Working Papers 15623, National Bureau of Economic Research, Inc.)