Why Our Economic Behavior Isn't Always Rational We don't always behave the way economic models say we will. We don't save enough for retirement. We give money to charity. This week, why we act in ways that go against our "rational" self-interest.
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Theory Vs. Reality: Why Our Economic Behavior Isn't Always Rational

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Theory Vs. Reality: Why Our Economic Behavior Isn't Always Rational

Theory Vs. Reality: Why Our Economic Behavior Isn't Always Rational

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SHANKAR VEDANTAM: From NPR, this is HIDDEN BRAIN. I'm Shankar Vedantam. When crisis hits, people go into survival mode. Some go further, putting self-interest and self-preservation over the well-being of others. We're seeing this with the COVID-19 pandemic.

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UNIDENTIFIED PERSON #1: At the end of the day, I'm not going to let it stop me from partying. You know, I've been waiting - we've been waiting for Miami spring break for a while.

VEDANTAM: Some people have refused to wear masks in stores.

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UNIDENTIFIED PERSON #2: It's become an all-too-familiar scene across the country - people getting physical over wearing masks inside stores. It is required, but unfortunately...

VEDANTAM: And there are even those who have bought up medical equipment to sell at a profit.

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UNIDENTIFIED PERSON #3: The agents were investigating 43-year-old Baruch Feldman for allegedly hoarding medical supplies, including masks and gowns, and selling them to doctors and nurses...

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VEDANTAM: At the same time, though, we also see another kind of response - people looking for ways to help each other. Erika Strauss Chavarria is a high school Spanish teacher in Columbia, Md.

ERIKA STRAUSS CHAVARRIA: My students call me Chav.

VEDANTAM: In March, she launched a grassroots network called Columbia Community Care to provide food and other essential products to people in need.

CHAVARRIA: We typically serve around 100 people per site per day. We also have our home grocery delivery service. And we have served, at this point, over 1,500 families in that capacity.

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VEDANTAM: There are many others like Erika. Someone in Texas tipped more than $9,000 on a dinner bill in order to help restaurant staff.

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UNIDENTIFIED PERSON #4: One message was written on the receipt only. It says, hold to pay your guys over the next few weeks. The tipster is a regular...

VEDANTAM: A retired farmer in Kansas sent an N95 to New York Governor Andrew Cuomo.

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ANDREW CUOMO: He sent one mask - one mask to New York to help a nurse or a doctor. How beautiful is that? I mean, how selfless is that?

VEDANTAM: Think about this man who donated a mask and the one who hoarded masks. In almost every sphere, our public and economic policies are designed around the assumption that most of us are going to behave like the selfish man. We craft laws and policies to contain wrongdoing and rule breaking. The one thing we rarely stop to ask - what effect does this have on the man who donated a mask, on people like Erika? This week on HIDDEN BRAIN, why economic models of selfish behavior regularly fail to describe how people actually behave. And later in the show, can policies crafted with only selfishness in mind have perverse effects on the rest of us?

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VEDANTAM: Back in 2015, I spoke with behavioral economist Richard Thaler in front of a live audience at the Willard Intercontinental Hotel in Washington, D.C. Richard is a professor at the University of Chicago and is the author of the books "Nudge" and "Misbehaving." More recently, he also won the Nobel Prize in economics.

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VEDANTAM: I want to start by asking Richard a real soft-ball question. Your friend whose name is Daniel Kahneman - he won the Nobel prize in economics some years ago - world-famous psychologist, brilliant author. And Danny Kahneman was once asked to describe Richard Thaler to a journalist. And he said that Richard's dominant characteristic, the thing that makes him stand out, is that Richard is lazy.

(LAUGHTER)

VEDANTAM: Can you tell me, Richard, why Danny said that and also why he insists that this was a compliment?

RICHARD THALER: What worse is A, Danny is my best friend and B, he said this was my best quality.

(LAUGHTER)

THALER: To this day, Danny defends this. And he defends A, that it's true, and B, that it's a compliment because he says that it means I'm only willing to work on things that are important. The truth is I'm only willing to work on things that are fun. And that's why I'm here today because I think we're going to have fun.

VEDANTAM: I think that's exactly right. So I first started talking to Richard maybe about 10 years ago. Let me just ask you to give us a very short introduction. What is behavioral economics, and why has it made such a splash, or why has it been so controversial over the last 15 or 20 years? How is it different than garden-variety economics?

THALER: You know, probably sometime in your distant past, all of you have had a class in economics. And you know that standard economics assumes that people are highly rational creatures capable of complex calculations, devoid of emotion, never having any self-control problems. And they're complete jerks. So I call these fictional creatures econs (ph). That's short for Homo economicus (ph)...

(LAUGHTER)

THALER: ...The Latin term. And I believe that for the last 50 or 60 years, economists have devoted themselves to studying fictional creatures. They might as well be studying unicorns because there are no econs. Well, there are a few economists I know who are close. But basically, they don't exist. And so we have very fancy models of fictional creatures. And the people I know have trouble figuring out how to divide a check if there are more than three people...

(LAUGHTER)

THALER: ...Occasionally - just occasionally - overeat or overdrink, have trouble saving for retirement. And, contrary to economic theory, some at least are willing to donate to National Public Radio...

(LAUGHTER)

THALER: ...Which any economist will tell you is a completely irrational thing to do because you can listen to it for free.

(LAUGHTER)

VEDANTAM: So when I first started talking to Richard about 10 years ago, it was for a topic that was called mental accounting. And Richard explained to me that mental accounting is something that we all do in everyday life, and one of the things that I noticed is as soon as Richard started talking, I started thinking of examples from my own life where mental accounting was playing a really, really big role. Let me just start by having you tell us what mental accounting is, Richard.

THALER: So a basic concept of economics is that money is fungible, which means that there are no labels on it. There's a video of Dustin Hoffman and Gene Hackman talking. And Gene Hackman is telling this story about when they were young actors. Hackman goes to visit Dustin Hoffman in his little apartment in Pasadena. Dustin Hoffman has asked him to borrow some money. And then Hackman goes into his kitchen, and he sees these mason jars that have labels on them. And one is rent, and one is utility, and there was nothing in the jar labeled food.

(LAUGHTER)

THALER: And so Hackman says, you don't need any money. You've got lots of money in all these jars. And Hoffman says, yeah, but there's nothing in the food jar. And so that's mental accounting, right? And it used to be, like, certainly in my grandparents' generation, that that's literally how people did it. But we still do it mostly in our heads. And it can make us do all kinds of funny things.

VEDANTAM: So one of the things that's happened over the years is that Richard has actually played a psychotherapist for many people who come to him with their economics problems. And I'm actually going to do the same thing here. One of the things I've noticed about myself is that my wife and I, we share our finances. So we have a joint checking account. We sort of draw from the same pool of money. But I've noticed that when I go to restaurants, I really like it when my wife pulls out her credit card and pays for the bill. Now, I am effectively still paying for it.

(LAUGHTER)

VEDANTAM: But it significantly increases my satisfaction with the meal...

(LAUGHTER)

VEDANTAM: ...Not to have to pull out my own credit card.

THALER: OK, so all right. So here's something that would be even better.

VEDANTAM: Yeah.

THALER: Assuming you and your wife trust one another...

VEDANTAM: Yes.

THALER: ...I recommend that you each get separate checking accounts.

VEDANTAM: What?

THALER: You can still have - my wife and I have this arrangement. So we each have a separate checking account and a joint checking account. And splurges - if I buy myself a new set of golf clubs that I desperately need, or she buys her fourth camera...

VEDANTAM: Right.

THALER: ...Because she travels the world taking pictures, I don't see that.

VEDANTAM: So the splurges come out of your individual checking accounts.

THALER: Exactly. And gifts. So if your wife picks up the tab, it will come from her account.

VEDANTAM: That's even better.

THALER: Even better.

VEDANTAM: That's really a good idea.

THALER: And, I mean, this is a recipe for marital harmony.

(LAUGHTER)

VEDANTAM: One of the findings of mental accounting is that people keep tabs in their head about how much money they need to make on an annual basis or a monthly basis or even sometimes on a daily basis. And one of the things that you explained to me was this might explain why it's sometimes difficult to catch a cab on a rainy evening. Can you tell us why mental accounting might make it harder for us to catch cabs on rainy evenings?

THALER: So this is a study that some friends of mine and I did a long time ago in New York. And we were taking a lot of cabs, and we would talk to the cabdrivers. And we would ask them, how do you decide how long to work? They rent the cab for 12 hours, which is a long time to drive in Manhattan. And then they have to take it back within the 12 hours. And a lot of them would say, well, what we do - I set a target. So renting the cab costs me 100 bucks, and then I have to fill the tank up. Let's say that's another 25 bucks. So I want to make a certain amount above that - say $100. And when I hit that, I go home.

Now, an implication of that is on days like rainy days, where there's lots of demand, they hit their target early, and they go home. Now, what would an econ do? An econ would drive more on the busy days. And on the sunny day when nobody needs a cab because they're walking, he would go out for a walk himself. Again, if we go back to getting along with your spouse, imagine the guy comes home at 2 in the afternoon, and his wife says, how come you're home so early? And he says, because I didn't make any money. Right? I mean, this is not going to go over well.

VEDANTAM: No, it won't. Right.

THALER: So you've got to go out there and drive around for three more hours, burning gas, not making any money.

VEDANTAM: Right. But the interesting thing, of course, is that standard economics would predict that people actually would act rationally - that they would actually work more when the demand is higher, and they would work less when the demand is lower. And, of course, what we find is exactly the opposite.

THALER: Exactly.

VEDANTAM: One of the interesting implications of mental accounting is that where - the source of people's money ends up changing how they spend the money. So there was a study by Viviana Zelizer, I believe at Princeton University, looking at prostitutes in Oslo. And what she found is that the sex workers were willing to spend money that they received in the form of welfare checks or other kinds of, you know subsidies, on things like rent and important things. But they spent the money that they earned from sex work - they were far more likely to spend that on drugs and alcohol. The source of the money determines how you actually spend the money.

I saw a clip from a video. It's called "Welcome To Me," starring the comedian Kristen Wiig, about a woman who suddenly wins a huge amount of money. And I'm going to play the clip for you. And I want you to talk about this idea. So if we could, play the video, please.

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UNIDENTIFIED ACTOR #1: (As character) Fourteen. There's 57, 15 and 54 and 39.

UNIDENTIFIED ACTOR #2: (As character) Thanks for calling the California Lottery. If you're calling to report a winning, just say, I'm a winner, at any time.

KRISTEN WIIG: (As Alice Klieg) I'm a winner at any time.

WES BENTLEY: (As Gabe Ruskin) What's your name?

WIIG: (As Alice Klieg) My name is Alice Klieg. I won $86 million.

JOAN CUSACK: (As Dawn Hurley) Think she really won the lottery? Seriously, can someone Google that?

JAMES MARSDEN: (As Rich Ruskin) You must be the big winner. Hi. I'm Rich.

WIIG: (As Alice Klieg) Me, too.

I want a talk show with me as the host.

JENNIFER JASON LEIGH: (As Deb Mosely) You want to talk about current events?

WIIG: (As Alice Klieg) No.

BENTLEY: (As Gabe Ruskin) What kind of stuff do you want to talk about?

WIIG: (As Alice Klieg) Me. How much will that cost?

MARSDEN: (As Rich Ruskin) Fifteen million dollars.

WIIG: (As Alice Klieg) Oh, and I want to come in on a swan boat.

TIM ROBBINS: (As Dr. Daryl Moffet) You're off your meds. You're living in a reservation casino. And you're hosting your own talk show.

WIIG: (As Alice Klieg) It's a new era - $86 million Alice.

UNIDENTIFIED ACTOR #3: (As character) We go live in five, four, three...

MARSDEN: (As Rich Ruskin) What is she doing?

CUSACK: (As Dawn Hurley) I think she's a little frozen.

BENTLEY: (As Gabe Ruskin, whispering) You're on TV now.

WIIG: (As Alice Klieg) Hello. I'm Alice Klieg, and welcome to me.

VEDANTAM: So, Richard, why is this? Why is it that when we receive money from certain sources, the way we think about spending that money changes dramatically?

THALER: You know, one of my colleagues - my fellow troublemakers - is David Laibson, who's just become the chairman of the Harvard economics department. He used to be one of my proteges. Now, you know - anyway.

(LAUGHTER)

THALER: Some of my friends had a roast for me a couple weeks ago because I had a big birthday. And he was telling the following story. A bunch of us were invited to Washington - must have been 15 years ago, when David was a struggling young assistant professor - and did something for the National Institute of Health. And they give us a $200 honorarium for the day. So I was saying, you know, this is ridiculous. We don't work for $200 a day. We have to go out and spend this money on dinner. And so we went out and had a good dinner - you could get quite a good dinner for $200 15 years ago. Now, David was not happy about spending $200 on dinner. And he now claims it was more like 300 when I got done with the wine.

(LAUGHTER)

THALER: But, you know, this was my way of thinking, I'm not going to work for $200, but I'm happy to have a good dinner as a result of helping out the NIH.

VEDANTAM: Yeah. So studies have found also, for example, that if you want to reward employees at the end of the year, giving them a cash bonus is very different than giving them a vacation, that even though you are giving them the same amount of money - you're giving them, let's say, $500 as a bonus versus $500 as a vacation - people report being significantly happier when you give them the vacation than when you give them the cash.

THALER: Yeah.

VEDANTAM: Why is that?

THALER: Well, because if you give them the vacation, they get to go guilt-free. I rediscovered this last week with my daughter, and I made a mistake. And it's a mistake I, of all people, shouldn't have made, but I had good reasons. And I was well-intentioned. So my daughter's a Mets fan, and one of the Mets' pitchers happens to be a neighbor. So she was an avid Mets fan, and I thought it would be nice to buy her two tickets to one of the first-round games when her neighbor was pitching. But it was - I got this idea late.

So I went online, and I found that I could get tickets for about $400. And - but I didn't have time to buy the tickets and mail them to her, so I sent her an email with a link to this website saying, look. It looks like you can get tickets for 400 each. I'm going to send you $1,000. Buy two tickets on this website. And she had already expressed great excitement about getting to go to this game. So I sent her that email. I get back a text - LOL. This is just like one of the examples from your book.

(LAUGHTER)

THALER: If you send me $1,000, I'm not going to spend it on baseball tickets.

(LAUGHTER)

THALER: So - now, she would have been happy if I had sent her the tickets. For sure, they would have gone to the game. But I send her the $1,000, nothing. So I didn't send her the thousand.

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VEDANTAM: Back in the 1970s, Stanford psychologist Walter Mischel conducted a series of experiments that came to be known as the marshmallow test. Small children were put in a room and told they could either get one marshmallow right away, but if they stayed in the room and didn't eat the marshmallow, they would get a second. Children who tried not to eat the first marshmallow came up with ways to distract themselves. Watching these children on video is hilarious.

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UNIDENTIFIED PERSON #5: All right, here's the deal - marshmallow for you. You can either wait, and I'll give you another one if you wait. Or you can eat it now. When I come back, I'll give another one, so then you'll have two. But stay in here and stay in the chair until I come back, OK?

VEDANTAM: I played Richard Thaler a video of a marshmallow test in progress where a small boy tries desperately not to eat the marshmallow placed in front of him. At one point, he leans lovingly into the marshmallow and takes a great big sniff and then sadly looks away.

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UNIDENTIFIED PERSON #5: How'd you do? Did you do good? You did?

UNIDENTIFIED CHILD: Yeah.

UNIDENTIFIED PERSON #5: You wanted to eat it, didn't you? Yeah. So did I tell you I'd give you another one?

VEDANTAM: The excited boy crams both marshmallows, chipmunk-style, into his mouth.

(LAUGHTER)

VEDANTAM: So talk about self-control, Richard. Why have classical economics ignored the idea that humans have trouble with self-control?

THALER: So economic theory says that we optimize and that we always choose what's best for us, so that includes self-control. And so you know, in these experiments, if you'd rather have two marshmallows than one, you should be willing to wait 10 minutes. But as, you know, obviously, kids have less self-control than adults. So this experiment kind of exaggerates that. But what you get from those videos, those precious videos, is the real important idea, which is that self-control is work. Resisting temptation is work. This is important.

You know, 30% of Americans are obese. Half of Americans are not saving enough for retirement. So these are enormous problems that we, as a society, face. And they are, at their core, because exerting self-control is difficult. In some of these marshmallow experiments, they used Oreos. And my favorite one of these - in one condition, there was a kid, and he had three Oreos in front of him. And he could have one now. But he was looking at the three. And what he does is, as soon as the person leaves the room, he opens up the Oreos, licks out the middle and then puts them back together.

(LAUGHTER)

THALER: And I have a deep suspicion - these were done many years ago at Stanford. I'm pretty sure that guy is Bernie Madoff.

(LAUGHTER)

VEDANTAM: Thank you all so much. And thanks to Richard Thaler.

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VEDANTAM: That was behavioral economist Richard Thaler speaking at a live event we recorded together in 2015. When we come back, what we lose when we let the notion that people are inherently rational and self-interested shape economic and public policy, and what we stand to gain by focusing on the good in people.

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VEDANTAM: I'm Shankar Vedantam. And you're listening to HIDDEN BRAIN. This is NPR.

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VEDANTAM: This is HIDDEN BRAIN. I'm Shankar Vedantam. Both in times of crisis and in normal times, public policy is often focused on keeping bad people from doing bad things. This makes sense if you assume that human beings are fundamentally motivated by selfishness. In this worldview, the job of government is to be a bad cop, a force that cracks down on knaves and villains.

Behavioral economist Sam Bowles thinks this is a mistake. He worries that such policies not only underestimate the capacity of most people to do the right thing but can inadvertently hurt our ability to do right by others. He explores this idea in his book, "The Moral Economy."

SAM BOWLES: I think one of the really remarkable things is that in policymaking circles, you are regarded as highly intelligent and realistic if you say, listen; everybody is selfish. We have to treat the citizen, the taxpayer, the employee and so on as if he or she was entirely selfish because, otherwise, maybe we're a chump. Or maybe we'll be taken advantage of and so on. So people who don't really believe it think that you should go on with this assumption of Homo economicus because it's prudent.

There might be some people who are really like that. And if so we'd better watch out. And therefore, we're going to design policies and so on as if everyone was that way. David Hume, a philosopher economist of the 18th century - just before Adam Smith - he said that in designing a government, you should assume that everyone is a knave - he used that ancient word, a knave - and has nothing in his mind but pursuing his own interests.

VEDANTAM: We're going to talk a lot about how values and norms and beliefs shape our economic, professional and civic lives. But I do want to lay down a caveat. It's one thing to say that feelings and values and preferences matter. It's another thing to imagine that feelings and values can explain everything.

So I am regularly motivated by self-interest. There are two gas stations across the street from one another in my neighborhood, and one is consistently more expensive than the other. Why? I don't know. When I first moved to the neighborhood, Sam, I stopped by the more expensive station. But once I noticed the price difference, I never went back. So you can take the model of Homo economicus too far. But presumably, you can also take its mirror image too far as well, right?

BOWLES: Absolutely. And the task that has to be done is to find ways of organizing our economy and our public policy not so that we rely solely on self-interest and surely not so that we rely solely on our regard for others but that we can rely on both. And we should design policies so that those two aspects of our human being are working together in a synergistic or complementary way.

That is what Adam Smith was talking about. His two great books were "The Wealth Of Nations," as is well-known, but also "The Theory Of Moral Sentiments." But what economists took over from Smith was the affluence through competition part, and they set aside the idea that there is a culture which is required in order for that system to work. He thought that we should combine the material interests with the moral sentiments, and he thought that there is a way of doing that.

So I think, yes, the idea that you can replace the self-interested system of competition on markets for profits and so on with an entirely different system based on, essentially, regard for others - I mean, it's obviously false. I mean, the whole world cannot be organized as if we're just on a little camping trip.

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VEDANTAM: At the same time, there are also consequences when we go too far in the other direction and imagine a world that is filled only with freeloaders, delinquents and selfishness. The measures we put in place to curtail the selfish can have perverse consequences on the rest of us.

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VEDANTAM: About two decades ago the Boston Fire Department was having a problem. Administrators were worried that workers were abusing the sick leave policy. And at that time, workers could take an unlimited amount of sick time, so administrators changed the policy.

BOWLES: They noticed that the call-ins for sick days happened to come on Fridays and Mondays, and that didn't seem kind of reasonable to them. So they told the firemen that they'd have a limited number of sick days, and if they called in more often than that, their pay would be docked. And the firemen felt that they were being distrusted. Most of them surely were not actually calling in sick when they were not. They were quite angry at the fire commissioner.

This happened just before Christmas, and what happened on Christmas Day was masses of them called in. The same thing happened on New Year's Day. In the meantime, the ones who were calling in sick in large numbers on Christmas and New Year's had their bonuses cancelled. And the conflict went on for over a year. The amount of sick call-ins doubled in the year following this until the commissioner finally realized that he'd made a big mistake, and he canceled the policy.

VEDANTAM: I understand there were almost 7,000 more sick days taken than were taken in the previous year following the implementation of these harsh policies.

BOWLES: Yes, that's right - up from around six to over 13. And the interviews with the firemen were really poignant. I mean, they said, look. You know, we come to work when we're sick. We risk injury and so on. And this person is saying that essentially, we are selfishly calling in when we're not sick. Well, surely some of them were. It looks like some of them were. But the problem was that applying that policy across the board backfired. Now, why did it backfire? Well, presumably, for the ones who really were being self-interested and calling in sick when they weren't, a policy like that would be necessary. But what about the other 95%? Well, it just had a terrible effect on their morale and their sense of obligation to the fire commissioner and to the fire department.

So that's a problem that we now face in society, which is in thinking about trying to motivate people to do things, incentives are often suggested as a way of doing this. That is, if you do this - whatever it is - you get paid more. And we hear about incentives for kids reading books and for losing weight, even incentives for voting. And recently in Germany, somebody has proposed we should have incentives - monetary incentives having to do with social distancing because of the COVID-19 pandemic and so on.

So there's almost nothing that hasn't been an example of, well, we can actually design some incentives to fix this. Now, that's a view that has dominated policymaking and also jurisprudence. And the whole area of law and economics and public policy is committed to the idea that we can design an incentive to induce the right behavior.

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VEDANTAM: I'm also struck by the fact that the policies implemented by the fire department in Boston changed the frame around which people were thinking about what it meant to take a sick day. So when the sick time was unlimited, your thinking was, OK. I would take sick time if I was sick or if I was injured, and I would take as much time as I needed. When I'm told, you can now have only 15 days, and if you go beyond that, they're going to punish you, now I start to think, OK. I better use those 15 days. If I'm not really sick but the year is nearly up, I'm going to lose that time. I better call in sick. Unintended, of course, but the frame changes the way I'm starting to think about what it means to be sick and what it means to take sick time.

BOWLES: That's exactly what happened, or at least that's the best explanation I could have of it. But here's another in which I think the way you put it as a framing problem is exactly right. In Haifa, Israel, there were a bunch of day care centers - about a dozen of them. And the kids came in the morning, and the parents picked them up in the evening. And as is the case, some parents came late. And they decided that they were going to impose a fine on the parents coming late.

Well, happily for economic science, a couple of behavioral economists knew about it. And so they said, now, wait. Wait. Wait. Let's just do it on half of the day care centers and not do it on the other half so we have a nice experiment. So sure enough, one day the parents came, dropped off their kids. And there was a notice. It said, starting tomorrow, anyone who's picking up their kid more than 10 minutes late will be fined 10 Israeli shekels. And then they recorded. They had been recording what was happening in the week before, and then they recorded how many people came late in the day care centers which had the fine and those where there was no fine.

It was amazing what happened. In the places where there was no fine, nothing happened. They continued - there was actually a small number. In the ones in which the fine was imposed on the parents coming late, the amount of lateness doubled. Now, what? How can you possibly explain that? The fine was supposed to get them to come on time to pick up their kids.

Now, if you think about it - I mean, there are lots of possible interpretations of what happened. But what you just said, Shankar, about framing seems to be the most likely explanation, which is - the parents framed coming lead or coming early to pick up their kids as essentially a moral question - I mean, perhaps not high morals. But you ought to pick up your kid on time because your kid might be anxious, because the teachers maybe want to go home and be with their kids or - there's something like that. OK. Sometimes there's extra traffic, and you're late. But it was a moral question.

As soon as you put a price on it, then it's just like a commodity. It's a shirt or a beer. Step right up. You want to get some lateness? Here's where you can get it. It only costs 10 Israeli shekels. So I think they turned this thing from an ethical problem into, more or less, a self-interest problem. And apparently, 10 Israeli shekels wasn't a big enough fine to really cause them to do anything differently.

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VEDANTAM: Researchers have found that different parts of the brain might be involved in weighing those problems. Ethical judgments are not processed the same way as cost benefit equations.

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BOWLES: Our brain has, obviously, these regions that do certain things. Processing benefits and costs is something which we're pretty good at, and that's done in one part of the brain. And there are other things having to do with feelings, obligations and so on. But the fact that just putting some money on the table will relocate the activity of the brain to the prefrontal cortex, which is where you process benefits and costs and so on, is really a striking finding. So it suggests that, you know, that's what we're like. And we're probably not going to change, so we'd better accommodate that.

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VEDANTAM: One of the sad things you note about the Haifa day care story is what happened when the day care reversed the policy around the fine. So obviously, it backfired. And then administrators reversed the policy and said, OK, we're taking away the fines. What happened afterwards, Sam?

BOWLES: That's an amazing thing. When they took away the fine, the lateness persisted in the schools - in the day care centers which had had the fine. The control schools - the control centers didn't - it had no effect. But - now, just to get this - I say it again because it's so unusual. When they imposed the fine on being late, the parents came later. And when they took away the fine, they continued coming later. Well, why is that?

Well, I think the story about framing is exactly what happened. It used to be an ethical question. You should come on time. They tried to. Sometimes they didn't. Once it became just a matter of step right up and purchase a little lateness if you want, that didn't change after they took the fine away. It still seemed to them - they had already been told, oh, this is something I can buy. And only now I can buy it for free because for some reason, they took away the price.

VEDANTAM: (Laughter) I'm wondering whether you might have friends in the economics department who might say the problem with Haifa was not that they introduced fines but that the fines were not big enough; that in some ways, the incentive was not strong enough. If you'd actually made it - instead of 10 shekels, if you'd made it 200, you know, everyone would have come on time because at that point, no one thinks 15 minutes is worth 200 shekels.

BOWLES: I think that's right. But I think that objection is perfectly sound, that there is some level of monetary incentive which will lead people to conform to the rules. It just means that because you start out by crowding out the ethical motivation, which was the reason why they were coming on time - most of them - in the first place.

VEDANTAM: Right.

BOWLES: So you start, basically, in the hole by having destroyed what Adam Smith calls moral sentiments. Now, the fact that you can make up for it by a large fine or, you know, severe penalties - of course you can do that. It's not clear that we want to live in a society which has fines of enormous amounts and so on or other kinds of penalties, particularly when we can find ways of mobilizing people's desire to be a good citizen, to be good to their neighbors, to be considerate of their teachers and so on.

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VEDANTAM: When we come back, what we can do to create policies that appeal to our better angels instead of our devilish impulses.

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VEDANTAM: You're listening to HIDDEN BRAIN. I'm Shankar Vedantam. This is NPR.

This is HIDDEN BRAIN. I'm Shankar Vedantam. Sam Bowles is a behavioral economist at the Santa Fe Institute. He argues that policies designed to discourage bad behavior might actually work better if they're framed instead to encourage good behavior. One idea that Sam has explored has to do with the concepts of crowding out and crowding in. To explain these concepts, he tells a story about his own kids. He wanted to incentivize them to do household chores, and he turned to mainstream economics for a solution.

BOWLES: My kids were very helpful around the house, and they did a lot. I was a single dad, and they were great. And as they became teenagers, they began to want to buy clothes and a lot of things like that. And I thought, well, you know, a good way to accommodate this is that - instead of them just doing stuff around the house, cleaning dishes and helping me in lots of ways, I would issue a price list. And then they could get paid for the stuff that they used to do for free.

VEDANTAM: (Laughter).

BOWLES: Of course, I thought it was a brilliant idea. And we agreed on the price list. It seemed reasonable. I posted it on the fridge. And what happened? Nothing. They stopped work entirely. They didn't do a thing. And they were not selfish because as I say, they'd been helping me a lot, doing a lot of work. But once it was for pay, it didn't seem to be the same thing. Now, it's true that, you know, when a particular item they wanted to buy - well, then they might do the lawn. But they ended up doing much less than before. And I had to bring the thing to a halt and say, let's go back to just doing stuff together. Now, I wonder if your listeners are thinking, oh, my God - those poor kids, having an economist for a dad.

VEDANTAM: (Laughter).

BOWLES: And I think there probably are - there's a lot wrong with having an economist for a dad. And I talked to the kids about it. They didn't really have a good explanation of what happened, but looking back on it now, I think that what happened was this. They actually enjoyed doing stuff together around the house, and they kind of thought they should help me out. They didn't want to see me doing all this stuff by myself.

And so it was something that they both enjoyed intrinsically and felt some obligation to do. But when I offered to pay them for it, it made them think differently about it, and it made it a matter of choice. So I think I made the mistake that Adam Smith never made, which is to treat the moral sentiments - that is, the ideas of value in contributing to others and so on - to treat them as if they're somehow separate from or just additive to the incentives that come from material interests and money.

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VEDANTAM: Sam's incentives demotivated his daughters, but it didn't have to be this way. You can design incentives to work with the intrinsic pride and satisfaction that people take in doing the right thing. Designed effectively, Sam says incentives can amplify, or crowd in, such motives. In Ireland in 2002, for example, the government wanted to reduce the number of plastic bags that people were using. They came up with an incentive but first made an appeal to national pride.

BOWLES: It was preceded by a big campaign about how these bags were so ugly and Ireland is beautiful. And there was an advertising campaign - don't trash the Emerald Isle and things like that. And then this thing was introduced. It was a very small additional cost. And within two weeks, the use of plastic bags for shopping was almost completely eliminated. Now, think about it. That case was very much like the parents who, when fined, came later instead of shaping up and coming earlier. In Ireland, when you had to pay for using a plastic grocery bag, they stopped using them.

And so we have something to learn from that case. Why is that different from the day care case? Because the results were the opposite. Let's just think about it. If you pick up your kid at the day care late, you're one of the very few people who's late. The only other people who see you there being late are other parents picking up their kids late...

VEDANTAM: (Laughter).

BOWLES: ...Other than the teacher and your kids, so OK - no problem there. They didn't explain why they were doing the fine. They didn't provide any explanation for why they actually should try to discourage lateness. In Ireland, it was quite the opposite. You're waiting in line, and the person says, do you want some plastic bags? And you have to say yes or no. And there's three or four or five, six other people there standing there, and they're looking on and, presumably from what happened, with disapproval. So it's a very public thing, and you have to choose to do it. Arriving late at the day care - you didn't even know that it was your choice because, I mean, maybe it really was traffic rather than deciding to have an extra cup of coffee with a friend. But the other thing...

VEDANTAM: Yeah.

BOWLES: ...Which I'm sure was important, was in Ireland - they said, look. This is a serious problem for us. We're trashing our country, and let's stop doing it. Let us stop doing it. And so I'd like us to learn from the cases where we have crowding in, crowding in meaning where the monetary side of the incentive or the side of the package enforces and increases the salience of the moral part.

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VEDANTAM: In recent weeks, we've all seen millions of people do things that are profoundly unselfish. Even if they weren't particularly concerned for their own health, millions of people around the world have followed public health guidelines and maintain physical distance from others. For many people, this has cost them their livelihoods. I'm wondering; do you think the COVID-19 pandemic gives us a way to think afresh about incentives and about the human capacity to do the right thing even when it's difficult to do?

BOWLES: Oh, yes. I think COVID-19 is going to change the way we think about economics and the way we talk about it. I think, for example, individualism and self-interest have definitely gotten a bad name over the past - over the duration of the pandemic. And I think we're going to be rethinking the value of values - that is, the value of ethical values as an important part of how you organize a society. So we need to have governments that are trusted by their people, we need people who trust the scientific advice of governments, and we need people willing to help each other.

So I think we're going to learn some good lessons, which is simply relying on self-interest in markets and in relations with government isn't going to be a good way to organize the future. COVID tells us that we have to rely on other things - communities, neighborhoods, obligations we have to each other which are not self-interested. That's what we're seeing is fundamentally getting people through this.

Now, of course, the market is very important. For example, the market is very important in providing incentives, which will be very essential to the distribution of production and distribution of a vaccine and of other treatments, including masks and so on. Governments are essential. I'm not suggesting that the government and the market are irrelevant. What I'm suggesting is that there should be a third dimension of thinking, talking and policymaking, and that's what I would call community or civil society - the things which are not governmental but they're not markets, either. For example, think about social distancing. Is that a market phenomenon? No. Well, is it a government phenomenon? Well, the government requires it in some places, but it could never enforce it.

So what I hope we're going to learn from this is that you have to rely on people's values such as they are, taking a realistic view of that. That's the first point. The second point is, oh, guess what? People aren't entirely selfish. Economists have to learn that lesson, too. People are not entirely selfish. We actually care a lot about others. And the third is a little bit frightening. Yes, we care about others, and sometimes we care negatively.

So for example, there have been reported increases in attacks on people of Asian descent in the course of the pandemic. And the rise of xenophobia in public statements and so on is just another reminder that one of the ways that we care about each other is that we care about their well-being. We love them, and we're willing to sacrifice for them. We also sometimes despise them and are willing to treat them badly. So then I think we have to face up to the fact that a lot of these values that we have - our susceptibility to kindness and cooperation - comes along in the same package with a susceptibility to zealotry and hatred of outsiders.

That's a real challenge for us in terms of thinking about how we can essentially have the better part of that without having the worse. I'm thinking that COVID-19, along with climate change, could be the driver of a new change, a change in both the economics - the content and what we teach our students and also how we talk about the economy and how we talk about our futures. And if I'm right, it'll involve words like community, solidarity and not just self-interest in markets and obedience to governments.

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VEDANTAM: Sam Bowles is a behavioral economist at the Santa Fe Institute. He is the author of "The Moral Economy: Why Good Incentives Are No Substitute For Good Citizens." Sam, thank you for joining me today on HIDDEN BRAIN.

BOWLES: Thanks a lot. I enjoyed the program.

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VEDANTAM: This episode was produced by Maggie Penman, Kara McGuirk-Allison, Max Nesterak, Cat Schuknecht and Rhaina Cohen. It was edited by Tara Boyle. Our team includes Jenny Schmidt, Parth Shah, Thomas Lu, Laura Kwerel and Lushik Wahba.

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VEDANTAM: For more HIDDEN BRAIN, you can find us on Facebook and Twitter. If you like today's episode, please share it with someone in your life who represents the positive aspects of human behavior that Sam described today.

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VEDANTAM: I'm Shankar Vedantam. See you next week.

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