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21.12.09

The rationality of going to the Brunce Springsteen concer

Tom Schaller proposes two analogies to highlight the respective irrationalities of progressive opponents and supporters of passing the US Senate's current health care bill. I can't comment on the applicability of these analogies to the health care debate, but I think his interpretation of the two allegedly analogous scenarios is too quick to cry irrationality.

Here's scenario one:

Let’s say you have a front-row ticket to a Bruce Springsteen concert, for which you paid $200, but on the night of the show a scalper outside the venue offers you $1,000 for it. You love Bruce, but you also need a new laptop, so you sell it. Then, walking toward the parking lot, you spot another front-row ticket on the ground. Nobody is around to claim it, so you head back toward the arena, where the same scalper again offers you $1,000 for the second ticket. Do you sell it or go to the show?

From a purely rational choice standpoint, you should sell again. Moments earlier, you valued a front-row ticket less than $1,000. (In fact, you paid $200 for the first ticket, so you actually valued it less than $800.) To value an identical ticket, mere moments later, more than $1,000 is irrational, right? Yet, many people would go to the show with that second ticket: It’s a "freebie," you still love Bruce, and something about having already profited $800 from the previous sale makes the second $1,000 offer seem less attractive.


I see nothing inherently irrational about selling the first ticket but keeping the second. Schaller notes that the reason you accepted the scalper's first offer is that you needed a new laptop. You can get a decent laptop for around $800. And most people only need one laptop. So it makes perfect sense that, now that your laptop needs are met, even $1000 is no longer worth giving up the concert for. That's the perfectly understandable "something about having already profited $800" that Schaller seems befuddled by.

Here's scenario two:

You're on a game show and the host offers you a choice of a guaranteed $500 in cash or a 50/50 chance to win $1,200. The expected value of the first option is $500, whereas the expected value of the second is $600 (half $1,200), meaning the latter is more preferable. Yet people typically opt for the guaranteed payout: They prefer a "bird in hand" instead of two—or in this case, 2.4—in the bush, so to speak. But again, taking the cash in hand is technically the less "rational" option.


Neither risk-seeking nor risk-avoiding are necessarily irrational when the sums involved make up a substantial portion of a person's wealth and the gamble is a one-time deal. Imagine that you learned just before going on this game show that you had no money in your bank account, and the rent -- which is $500 -- is due. What kind of fool would pass up a sure chance of avoiding eviction* for a chance at a little extra cash? On the other hand, if the rent is $1000, it would be quite irrational to take a sure thing that's less than that, even if it's greater than the expected value of the gamble (say, $800), since you can't pay part of the rent and get just part-way evicted. This is not to say that people are never irrational about risks -- after all, casinos are still in business -- but merely comparing someone's choices to the expected values of the options isn't enough to tell you when irrationality is occurring.

Both of these scenarios depend on subjecting one-off, personal decision-making to the expected utility calculations that are deemed economically rational. Consider how the calculation of the expected value of a gamble is justified in the decision-making literature -- $600 would be your average per-gamble payoff if you played the game many times. If this was the actual situation you faced, it would be quite irrational to stick with the sure thing. But in life (and certainly in health care reform) you only get to play gambles a few times at most. A similar logic applies to the concert tickets. If you knew you had the opportunity to do some bulk leveraging of cheap tickets to scalpers, it would make sense that each deal should be evaluated on equal terms. But if you're just one person with one ticket, a strategy that works in the abstract aggregate no longer matches what is really rational behavior.

I think psychology has pretty conclusively shown that humans are a deeply irrational species. I just don't think these two scenarios support that conclusion.

*We'll assume you've already exhausted your landlord's patience for extensions, installment payments, etc.

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