Sunday, January 15, 2012

Ricardian Equivalence And Unequal Vividness

It's not that often that my research directly addresses a major issue of the day, but I had a little footnote on Ricardian equivalence in "The Humean Theory of Practical Irrationality," just out in the Journal of Ethics and Social Philosophy. So I'll say something about that.

The paper tries to solve a problem for those who accept both of two popular theses about desire and action. First, people do whatever they believe will get them what they want. This is a psychological thesis about how people actually act. Second, it's rational for people to do whatever they believe will get them what they want. This is a normative thesis about what the right choice is. It's only about the right choice in the sense of being rational -- in the sense where it's right for the assassin to load his gun before trying to shoot -- not in the sense of being the morally right thing to do or anything like that.

Here's the problem with the two theses: since what we do and what it's rational to do are defined in exactly the same way, it seems that we can never act irrationally. And that's trouble, because it's pretty clear that people do act irrationally sometimes.

In the paper, I argue that "desire" in the psychological theory should be understood as the immediate motivational force that desires exert on you right when you act. Meanwhile, "desire" in the normative theory should be understood in terms of the dispositional strength of desires. We usually describe a sleeping person as desiring various things, even though no immediate motivational forces are operating then. Similarly, we can say that someone desires to marry his girlfriend even if he's on a roller coaster or something and he's not thinking of his girlfriend at the moment. This is the dispositional sense of desire -- it treats our desires as disposition rather than as immediately active forces.

Setting up the theories that way leaves just the right amount of room for human irrationality. Usually, we pursue what we desire more in the dispositional sense. But if we're presented with much more vivid images of the thing we desire less in the dispositional sense, we may pursue it anyway, because vivid images of something make the desire for it more forceful. Someone who's trying to quit smoking will find it easier to give into temptation and smoke again in a smoky bar than while jogging, because the representations of the pleasures of smoking will be much more vivid there.

What is Ricardian equivalence, and what does this all have to do with it? It's the hypothesis that fiscal stimulus can't actually get the economy going, because any money you spend now will have to be paid back in the future, and people will just save the money you give them to pay taxes towards future debts. Paul Krugman and Brad DeLong have been criticizing this idea lately on grounds that there's no reason people would just save the whole amount of the stimulus immediately.

The commonsense psychological point I'd like to add (it's in footnote 20) is that people have a natural tendency to satisfy desires whose objects are vividly represented before them at the moment. So when someone at the bar chooses between buying another drink and saving to pay future taxes, the drink is going to have a pretty big advantage. Our desires are stimulated by the things right in front of us, not the tax burden 30 years in the future.

I kind of wonder if some economist could make a career out of re-running economic models involving how people plan for the future under psychological assumptions that actually fit how people make decisions.


Enthusiast said...

Neil, can we not say, instead of describing a dichotomy between "immediate" and "dispositional" desires, that we have at all times a number of goals/desires, some of greater importance to us, some of lesser, some with long-term elements, others more short- or medium-term, and that we act "rationally" when we prioritize our goals/desires and behave in a manner designed to maximize the likelihood of our achieving our most important goals/desires even at the expense of less important ones? Then irrationality would reside in either failing to prioritize in the first place or failing to act in accordance with priorities, which might or might not depend on the "visual stimulus" of an immediate desire.

CreidS said...

Perhaps related: Basic Laws of Human Stupidity, by Carlo M. Cipiola (a professor from UC Berkley)

And analysis in the light of evolution from physicist Johannes Koelman

As for Ricardian Equivalence, I can attest to the fact that the large banks mostly sat on their TARP money, and used their profits from their captured markets to pay it back. They've been unwilling to invest it. It is something of a first mover problem.

Stentor said...

I kind of wonder if some economist could make a career out of re-running economic models involving how people plan for the future under psychological assumptions that actually fit how people make decisions.

Google "behavioral economics."

Brock said...

Here's a point I haven't seen made by Krugman and Delong. When a country (like the US) borrows in its own currency, and is using a fiat currency not a commodity currency, there are two direct ways in which it can pay off its debt: increased taxation, or seigniorage.

Insofar as people national debt to be paid off via taxation, they will tend hoard money. Insofar as they expect it to be paid off via seigniorage, they will tend to spend money, in order to use it before its value is decreased.

The first effect lowers the velocity of money, the second effect increases it. Which effect will dominate is an empirical question.

I'm surprised I haven't seen this point made by Krugman and Delong, so maybe there is something I'm missing.

Greg Hao said...

Not as awesome as Possible Girls but I'll give this paper a whirl on my next flight.