Free Market Madness

January 22, 2009 BY danariely

A few days ago there was lots of happiness and excitement in the street and you must have wondered what was the source of this excitement.

Well, it was the publication of Peter Ubel‘s new book on behavioral economics — Free Market Madness

To celebrate, here is a web interview with Peter and you are all welcome to join in on the conversation.

Dan: You are a physician writing a book about politics and behavioral economics.  Not to get all Blagojevichy on you, but what the f%^# qualifies you to write about this topic?

Peter: I am a big fan of yours too!

Dan: But seriously.

Peter: I conduct research on the irrational forces that influence people’s medical decisions.  In addition, I take care of patients in clinic every week whose health problems arise, in large part, from their own decisions and behaviors — people with diabetes who cannot lose weight despite their best efforts, smokers who can’t kick the habit despite covering their body with nicotine patches.

Dan: What does that have to do with politics?

Peter: It means that when we leave people to fend for themselves in the free market, we can predict that they will hurt themselves by making bad decisions.  Starting from this perspective I try to expose the unconscious forces that influence our behaviors.  And then I try to show people what that means for the kind of debates we have about whether unfettered free markets deserve some, um, fettering.

Dan: All this looks a bit too general to me.  Can you give me an example of one disease, one mistake that patients make, and one policy recommendation?

Peter:  Diabetes.  We have an epidemic of adult onset diabetes in developed countries now, because people are gaining so much weight.  And the obesity that causes diabetes is a direct result of the market:  capitalism has spurred on innovation in food production, so that people now can eat tasty, calorie dense food without having to spend much time preparing or cleaning up the food (open the bag of chips, insert in mouth, yum . . .).   

What’s the mistake here?  Well, people’s appetites are influenced by unconscious forces. Change the size of my dinner plate and I’ll eat 24% more calories; tell me the food is made of “healthy fat,” and I’ll tell you it doesn’t taste good (even though, as experiments have shown the same cracker will “taste great” if I convince you it is made out of unhealthy fat.)  How much food we eat, then, and how that food tastes is far less rational than most of us believe.

Dan:  So, does this mean that the fault is with capitalism and innovation in food production?  And if this is the case what policies would you try to implement to overcome this problem?

Peter:  We need to experiment on a whole slew of policies to combat obesity: New York is requiring restaurants to post calories on their menus, a good start, but one that is likely susceptible to biases.  For example, if I was trying to sell Big Macs now, I’d add a new line of “Bigger Macs”–add a couple slices of bacon, 3 more kinds of cheese.  I’d proudly label this new burger’s calories: 50% more than the original Big Mac.  And I’d expect two things to happen:  first, some people would be drawn to this meal — risk takers, contrarians, Homer Simpson wannabees and so on; second, most people would not want this new burger, but they’d look at the Big Mac and think, “Wow, that burger is pretty darn healthy!”

I’d like to see someone try to label unhealthy food with emotive pictures, signaling that people should consider trying out another entrée.  Maybe a profile of people in varying stages of obesity?  

Ok, maybe some other symbol.

Dan: Your book is actually not much about medicine and medical related mistakes and it is largely about individuals and markets.  It seems that you believe that markets are efficient in the way that they operate, but that the outcome they arrive at is not optimal.  Can you explain this?

Peter:  Hmm, efficient wouldn’t be on my short list of words to describe markets.  Efficient sounds so uncontroversially good.  

I am a fan of capitalism. Very happy I grew up in the USA rather than the USSR.  But that doesn’t make capitalism, or free markets, perfect.  Look at all the people who bought mortgages they shouldn’t have bought, or SUVs that they mistakenly thought were safer than other cars.  (SUVs are more dangerous than minivans and even sedans, because they have a nasty habit of rolling over–very inconsiderate of them!)

Our brain can tell us that a long commute isn’t a big deal, or an adjustable rate mortgage isn’t a big risk, and the market efficiently provides us with suburban homes and fancy mortgage packages.  That doesn’t mean we picked the right home at the right price.

Confession: I live in the suburbs (barely), drive a sedan (because I don’t feel manly enough for an SUV), based the last decade of my savings and spending behavior on the assumption that my stock holdings (retirement accounts in mutual funds) would grow at 10% a year, and that my house’s value would grow faster than inflation.

At age 46, I have lots of time to rejigger my retirement plans.  But my fingers are crossed that my kids don’t get into college!!

Dan: So now that we know we should not take any advice from you, what are you hoping is the main thing that readers will learn from your book?

Peter:  This may be too personal but if they can go home at Christmas armed with good arguments to take on their insanely libertarian older brother, who really does think the market can solve all the world’s problems (“we need more free market in medicine, schools . . .”), then I will be happy.