Monthly Archives: September 2013

The Nerd’s World Cup: Does Behavioral Economics Disprove Rational Economics?

The USA just beat Mexico to qualify for the World Cup.

From a rational, economic perspective, the USA should qualify for every sporting event on the planet. The USA has more people, more resources, and more free time to invest in sports. When you take a look at the major medal winners in the Olympics, more medals mostly correlates to these factors.

So while the fact that we are the bottom-feeders of soccer doesn’t hurt my American pride, it does pique my interest. Why doesn’t the rational model work?

The answer is that the rational model does work, but the number of factors that I put into my model while walking from the TV to the bathroom doesn’t even come close to telling the whole story. There are many more factors: The United States lacks a history of soccer, we lack a culture that cares about the sport, Sportscenter doesn’t air it enough, Mexico’s star player had a tight hamstring (maybe). If we could measure these and the 10,000,000 other factors that go into it, you could literally chart on a graph how many wins a soccer team earns.

In an economic decision the same simplification errors apply. We say that people will pay $3 for a bottle of Gatorade because it gives them $1 of hydration, $1 of flavor, and $1 of brand appeal. Allegedly, any purchase can be rationally broken down into the elements of value that the purchaser receives. Obviously, this doesn’t explain the many abnormalities in rational economics, like why someone will pay $6 for the same Gatorade. These abnormalities are explained by the science of Behavioral Economics. A behavioral economist will explain that one person buying that same Gatorade for $6 can be attributed to the fact that the person has a higher price tolerance, due to gradually being accustomed to higher purchases. Or maybe even because someone told him Gatorade is worth $10 and he thought getting it for $6 was a great deal. That behavioral economist might explain the USA’s overall soccer futility with the theory that emotional benefit of winning a soccer match is not as great the emotional benefit of winning a football match.

And if they did this, I would agree with this economist. But then that economist might continue his theory, and try to say that behavioral economics disproves rational economics. Because an emotional factor affects team USA’s performance or the price we pay for a Gatorade, we therefore can’t create rational models. With this I disagree. Behavioral economics does a good job of identifying cost/benefit factors which are hard to quantify. But just because factors are hard to quantify does not mean they are not actually measurable. We could, with enough data, measure how the number of seconds that Sportscenter airs soccer coverage affects soccer enrollment among children. And then (theoretically) do this for 10,000,003 other factors. When we arrive at the end of this excruciating process we have, once again, a rational economic model for the number of wins a soccer team earns.

Behavioral economics is a stop-gap. It is a reasonable way of way of making shortcuts in measurement when you simply lack the tools to measure further, like saying the world is flat because it looks flat. But it still a part of economics. And, like team USA, it has a ways to go before it reaches its goal.