While marketers and psychologists have long known that you can fool all of the people some of the time and some of the people all of the time, it has taken economic theory a little while to catch up with the idea. Most economic models are populated by decision-makers who have more in common with the cool-headed logician Mr Spock than the impulsive and self-destructive Homer Simpson.
There are good reasons for that. The main argument of my last book was that Spockish behaviour is far more common than most of us appreciate. But unSpockish behaviour certainly exists. Popular discussions of economic psychology tend to start and end with that observation. Yet there is much more to be said, and many economists are now exploring the real-world implications of different brands of unSpockishness.
One useful distinction is between the kind of irrational behaviour so often displayed by Homer Simpson, and that displayed by Odysseus. When Odysseus ordered his sailors to tie him to the mast, it was because he knew that he was weak-willed and would be tempted to his doom by the song of the Sirens. Homer Simpson is also weak-willed, but he lacks the foresight to do anything about it. (Classicists will recall that Odysseus was forewarned by Circe, but Homer is often forewarned by his wife Marge, to no avail.)
Odysseus is sophisticated but “time-inconsistent” – a term that means his preferences change when temptation rears its head. Homer Simpson is both time-inconsistent and naive.
Imagine – I realise this sounds like some bizarre joke – how Mr Spock, Odysseus and Homer Simpson would go about applying for membership of a gym. Spock would choose a suitable contract – a costly payment per visit, or an annual flat-fee for unlimited visits – after correctly forecasting his gym usage. Simpson, wrongly expecting that he would use the gym a lot, would sign up for the expensive annual membership. Odysseus might also choose the annual membership, but for a different reason: he would hope that the “all-the-iron-you-can-pump” contract might provoke him to exercise, despite the foreseeable temptation to stay in bed.
Even if Odysseus and Homer did both choose the same contract, the distinction between them as men still matters. The economists Ulrike Malmendier and Stefano DellaVigna have shown that a government regulator cannot make Odysseus better off. Odysseus will be able to exercise as much as Spock, and for the same price, but will do so by cleverly planning ahead and choosing the contract that will prompt him to do so.
Homer, by contrast, will pay too much and exercise too little, which means that in principle a sufficiently wise and benevolent regulator could save him from himself. Even a clumsy regulator might help Homer by yelling at him not to be an idiot.
The Spocks, Simpsons and Odysseuses of the world face many strange contracts. DellaVigna and Malmendier – whose most famous research paper is titled “Paying Not to Go to the Gym” – have taken inspiration from trying to spot and decipher them. We are all familiar with the odd practice of offering annual gym memberships – and with the naive Homer Simpsons who sign up for them anyway. Subscriptions to worthy magazines and to sophisticated film rental clubs fit much the same mould. In each case, customers are likely to struggle to “consume” as much as they intended, and so prices are front-loaded.
But products priced the other way around are probably more common: credit cards offer “teaser” rates, while customers who sign up for a mobile-phone contract pay nothing for their expensive phone. The companies who offer such contracts expect that customers will binge, consuming more than they expected. That is one reason why they fight with each other to sign up the customers in the first place – and the Homer Simpsons are the juiciest catches of all.
Also published at ft.com.